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In This Issue
- METLIFE v. GLENN: MINIMIZING THE IMPACT
- 409A DEADLINE REMINDER
- GENETIC DISCRIMINATION LAW AFFECTS ERISA PLANS
- 403(B) DEADLINE REMINDER
- HEART ACT BENEFITS MILITARY SERVICE MEMBERS
The Supreme Court’s recent decision in MetLife v. Glenn, in which the Court found that a “conflict of interest” should be considered in determining whether a benefits denial was an abuse of discretion, is expected to have a dramatic impact on the administration of benefits claims. This article will summarize the decision and provide some considerations for plan sponsors in a post-MetLife world.
If the language in the applicable benefits plan gives the administrator “discretion” to make eligibility determinations, any denial of benefits is normally upheld in court unless the court finds that the administrator “abused its discretion.” In other words, the court defers to the judgment of the administrator unless the determination appears to be unsupported by the evidence or the language of the applicable plan. As a practical matter, this has meant that the administrator normally has fairly wide latitude to make benefits determinations.
If the “discretionary” language is absent from the applicable plan, or if the court finds that the administrator abused its discretion, the court reviews the determination “de novo,” meaning that the court makes its own independent review of the circumstances of the denial. Courts conducting de novo reviews of benefits determinations essentially substitute their own judgment for that of the plan administrator and are much more likely to overturn benefits denials.
The Supreme Court in the MetLife case addressed the degree to which an ERISA plan administrator’s conflict of interest (brought about by its dual roles) should be taken into account by a court.
The MetLife Case
Wanda Glenn was a participant in the Sears, Roebuck & Company’s long-term disability plan, which was administered and insured by MetLife. Under the terms of the plan, a claimant was entitled to LTD benefits for the first 24 months after employment if he or she could no longer perform the duties of his or her job. For continued eligibility after the first 24 months, the claimant had to be incapable of performing any job for which he or she was qualified in terms of skills, education, and experience. Ms. Glenn left her employment with Sears because of a heart condition that left her incapable of performing her job duties, which allowed her to qualify for LTD under the more lenient “first 24 months” standard. During her first 24 months, and with MetLife’s encouragement, she also filed for and received disability benefits from the Social Security Administration. The Social Security benefits went to MetLife as an offset rather than to Ms. Glenn.
Although the Social Security Administration had found that Ms. Glenn was “totally” disabled, MetLife denied benefits to Ms. Glenn after the initial 24-month period expired, finding that she was capable of sedentary work. Ms. Glenn challenged the denial in court, and MetLife contended that it was entitled to the “discretionary” standard of review because the plan language gave MetLife discretion in making benefits determinations.
The federal district court upheld the denial, finding that “abuse of discretion” was the appropriate standard of review and that MetLife had not abused its discretion. However, Ms. Glenn appealed to the U.S. Court of Appeals for the Sixth Circuit (Kentucky, Michigan, Ohio, and Tennessee), which reversed. The Sixth Circuit found that MetLife had a conflict of interest because it both insured the claims (that is, was responsible for paying them) and administered the claims. The court found that this “conflict” should be treated as a relevant factor in deciding whether MetLife abused its discretion. Then, the court found that MetLife had abused its discretion and ordered that Ms. Glenn’s benefits be reinstated.
Supreme Court Findings
MetLife appealed to the Supreme Court, which affirmed the Sixth Circuit. The Supreme Court did not provide a specific test, but it held that a “conflict of interest” must be treated as a factor when analyzing the possible abuse of a plan administrator’s discretion. Whether such a conflict is determinative will depend on a number of factors, including the insurer’s “history of biased claims administration,” the insurer’s effort taken “to reduce potential bias and to promote accuracy,” and the circumstances of the case. Although Glenn dealt with an insurance company, the Court made clear that an employer who administers its own plan also has a conflict of interest – indeed, an even more obvious one.
Impact on ERISA Litigation
The implications of the MetLife decision are alarming. It is common for employers who self-administer and third-party insurers, to both determine and pay benefits claims. By effectively overturning the deferential standard of review even where the plan language gives discretion to the plan administrator, the MetLife decision is sure to create more ERISA litigation and more decisions favorable to claimants.
In addition to these concerns, the decision certainly does not provide a clear standard of review for ERISA litigation. Chief Justice Roberts indicated that the majority left “the law more uncertain, more unpredictable than it found it.” Although the Court held that ERISA cases should still be reviewed under a deferential standard even where there is a conflict of interest, the importance of the conflict will be decided on a case-by-case basis, and de novo review will be much more likely than before. The ruling, as Chief Justice Roberts said, “invites the substitution of judicial discretion for the discretion of the Plan Administrator.”
All of that having been said, and apart from the conflict of interest issue, there were some aspects of the MetLife determination that troubled the majority and no doubt affected the outcome of the case. First, according to the majority, MetLife had actively encouraged Ms. Glenn to file for Social Security Disability (which has an eligibility standard similar to the MetLife “post-24-month” standard) and then was able to use the Social Security benefits to offset its own obligation to pay benefits to Ms. Glenn. Although this is perfectly legitimate, it cast a shadow over MetLife’s subsequent finding that Ms. Glenn was not completely disabled. Second, according to the majority, MetLife’s determination was based on the findings of one physician who had not examined Ms. Glenn but had only reviewed records provided by other physicians, most of whom had physically examined Ms. Glenn and all of whom had found that she was totally disabled.
Plan Sponsors should evaluate their current benefits claims review processes and take steps to ensure that the processes are not biased due to any financial “stake” that the sponsor has in its own benefits determination. Sponsors who use outside providers should review the providers’ decision-making history and history of success or failure in the courts. They should also examine the structures, practices and procedures of plan committees that review benefit claims. The plan committees themselves must be sure that their decisions are unbiased, and are properly documented and communicated. Although doing so may be prohibitively expensive as well as impractical, Plan Sponsors may want to consider hiring independent fiduciaries to make or assist in making benefit determinations so that claims of conflict of interest will be minimized. No matter how Plan Sponsors choose to deal with the MetLife decision, there is no question that they and their vendors will have to live with a higher level of court scrutiny in the future.
This is a reminder that the deadline for amending deferred compensation arrangements to comply with Section 409A of the Internal Revenue Code is December 31, 2008. The following are some of the types of arrangements that may be subject to 409A:
• Any arrangement that may provide for payment of compensation after 2004, and after the year earned;
• Non-qualified deferred compensation plans;
• Supplemental executive retirement plans;
• Short-term and long-term bonus plans;
• Employment and change in control agreements;
• Severance pay arrangements;
• Other post-termination benefits;
• Stock option plans;
• Stock rights (SARS and “phantom stock”); and
• Expense reimbursements, including taxable health benefits.
The following types of arrangements are exempt from 409A:
• Qualified retirement plans;
• Restricted stock plans taxable under Code Section 83;
• Bona fide vacation leave plans;
• Disability, death benefit, and sick leave plans;
• Short term deferrals (paid within 2 ½ months of the end of the year);
• Certain severance arrangements; and
• Deferred compensation earned and fully vested before 2005 and not materially amended after October 3, 2004.
Arrangements subject to Section 409A may have to be modified substantially to comply with 409A definitions such as Change in Control, Disability, and other key terms. In addition, the deferral election, payment timing and the forms of payment may have to be modified to comply with 409A.
On May 21, 2008, President Bush signed into law the Genetic Information Nondiscrimination Act (“GINA”). The law prohibits employers, employment agencies, labor organizations, and health insurance providers from misusing individuals’ genetic information. Congress had noted that genetic research has created “new opportunities for medical progress,” but also that genetic information has been abused in the past. GINA expresses our nation’s general concerns about genetic discrimination and how employers and insurers might misuse genetic information.
For Constangy’s Client Bulletin about the employment-law provisions of GINA, click here. What employers may not realize is that GINA has many provisions that will affect ERISA plans, as well.
For purposes of GINA, “genetic information” is information about an individual’s or family member’s genetic tests. Genetic tests include any analysis of DNA, RNA, chromosomes, proteins or metabolites that detects genotypes, mutations or chromosomal changes.
GINA amends the Employee Retirement Income Security Act of 1974, making it unlawful for group health plans or health insurance issuers offering group health insurance coverage to adjust premiums or contribution amounts for the group covered because of genetic information. It is, however, still lawful to increase premiums for employers based on the manifestation (diagnosis) of a disease or disorder of an individual who is enrolled in the plan. For example, an employer’s group health rate cannot be raised because a participant has a family history of congestive heart failure. However, the insurer could legally raise rates because a participant in the plan was diagnosed with congestive heart failure.
Health insurers are prohibited from requesting, requiring, or purchasing genetic information before an individual’s enrollment in the plan or in connection with such enrollment. Health insurers are also prohibited from requesting, requiring, or purchasing genetic information for underwriting purposes. Finally, GINA prevents health plans and insurers from requesting that enrollees take a genetic test. Provisions affecting group health plans and the plans’ insurers will be effective with the plan year that begins one year after enactment (January 1, 2010, for calendar year plans).
The Health Insurance Portability and Accountability Act of 1996 prohibits discrimination based upon an individual’s health status. HIPAA’s security and privacy provisions protect individually identifiable health information. GINA expands the definition of Protected Heath Information to include genetic information. It also prohibits the use or disclosure of PHI to insurance companies for underwriting purposes.
GINA gives the Department of Labor the authority to impose penalties on Plan Sponsors of up to $100 per day, per participant, for violations of its new provisions and HIPAA’s existing provisions.
Confidentiality and Employment Discrimination
These provisions of GINA are discussed in more detail in Constangy’s Client Bulletin on the employment provisions of GINA; however, here is a summary:
Confidentiality. Genetic information in the possession of an employer must be kept on separate forms and in separate medical files and must be treated as a confidential medical record. The employer will be deemed to be in compliance with GINA’s confidentiality provisions if it maintains the records in accordance with the confidentiality provisions of the Americans with Disabilities Act. Disclosure of genetic information is prohibited except under limited circumstances.
Employment Discrimination. The employment provisions prohibit discrimination against applicants or employees based on their genetic information or the genetic information of their family members, as defined in GINA. It is also unlawful to “limit, segregate, or classify” employees on this basis. GINA also generally prohibits employers from requesting or requiring genetic information from employees, or from their family members.
As mentioned above, Title I of GINA (the portion regulating group health plans and health insurers) is effective for plan years beginning one year after GINA’s enactment. Regulations under Title I of GINA must be issued by May 21, 2009. However, amendments to the HIPAA Privacy Rule must be issued within 60 days of enactment. It is important that plan sponsors review their existing plans to ensure that they are in compliance with GINA. This may require some plan sponsors to modify current practices and work with vendors to ensure the protection and proper usage of genetic information.
If you sponsor a 403(b) tax deferred annuity plan, please be aware that final regulations requiring significant changes were issued in July 2007. Existing 403(b) plans must be amended by December 31, 2008, to comply with the new regulations. If you do not have a written plan document for your 403(b) plan, one must be in place by December 31, 2008.
The Heroes Earnings Assistance and Relief Tax Act of 2008 (“HEART”) was signed into law on June 17, 2008, to provide special benefits and protections to service members. It brings significant changes in retirement plans and health flexible spending arrangements (“health FSAs”) for members of the armed services. Following is a summary of the provisions affecting employer-sponsored retirement plans and health FSAs.
Retirement Plan Changes
Participants who take distributions from their retirement plans before age 59½, death, or disability are normally subject to a 10 percent penalty on the amount of the withdrawal. The Pension Protection Act of 2006 temporarily suspended this requirement to allow qualified reservists to receive a distribution from a 401(k) plan, 403(b) plan or IRA without triggering the 10 percent penalty. HEART makes these qualified reservist distribution provisions permanent.
Under HEART, a qualified reservist distribution is a distribution (1) from an IRA or attributable to elective deferrals under a section 401(k) plan, section 403(b) annuity, or certain similar arrangements, (2) made to a qualified reservist who was ordered or called to active duty for a period of at least 180 days or for an indefinite period, and (3) that is made during the period beginning on the date of such order or call to duty and ending at the close of the active duty period. An individual who elects to take a qualified reservist distribution is prohibited from making elective deferrals or employee contributions for six months after the date of the distribution.
An individual who receives a qualified reservist distribution may, at any time during the two-year period beginning on the day after the end of the active duty period, make one or more contributions to an IRA in an aggregate amount not to exceed the amount of the qualified reservist distribution. The dollar limitations otherwise applicable to contributions to IRAs do not apply to any contribution made under this special repayment rule. Additionally, no deduction is allowed for any contribution made under this special repayment rule.
The Uniformed Services Employment and Reemployment Rights Act (USERRA) generally treats periods of qualified military service as periods of employment for purposes of retirement plan vesting and benefit accruals. Service is credited when the employee returns to work. HEART permits employers to treat an individual who dies or is disabled while performing qualified military service as if he or she had worked until death for benefit accrual purposes. HEART also requires retirement plans to pay the beneficiaries of a deceased service member any benefits the plan would have paid had the participant died while employed (except those that accrued during military service).
Differential Wage Payments as Compensation
For employees called to active duty, some employers voluntarily make up the difference between the employees' military pay and what the employees would have earned if they had continued employment with the employer. Such compensation is commonly referred to as “differential pay.” Under HEART, individuals receiving differential wage payments are considered employees, and the payments are treated as compensation. Therefore, employee retirement plan contributions can be made from these amounts. If an employer pays differential pay, and if contributions or benefits under a retirement plan are based on differential pay, all service members of the employer must be entitled to receive differential wage payments on reasonably equivalent terms and must be entitled to make contributions based on such differential payments on reasonably equivalent terms.
These provisions apply to plan years beginning after December 31, 2008.
Health FSA Changes
The HEART Act allows “Qualified Reservist Distributions” from a health FSA. Normally, amounts left in a health FSA at the end of the plan year are forfeited by participants under the “use it or lose it” rule. If a participant elected to contribute to a health FSA and then was called to active duty mid-year, any unused amounts in the health FSA would be lost.
HEART allows a distribution of all or a portion of the unused amounts in a health FSA to a participant who is called to active duty provided that (1) the call to active duty is for a period of at least 180 days or for an indefinite period, and (2) the distribution is made between the date of the call and the last date that reimbursements from the health FSA could have been made for the plan year that includes the call to active duty. Such distributions are Qualified Reservist Distributions. Although the amounts will be taxable to the participant, they will not be forfeited.
The health FSA provisions of HEART are effective for distributions made after June 17, 2008. Employers who wish to provide Qualified Reservist Distributions under their health FSAs will need to amend their plan documents and issue summaries of material modifications to plan participants.
CONSTANGY'S EMPLOYEE BENEFITS PRACTICE GROUP
If you would like more information about the issues covered in this ERISA Strategist or any other employee benefits issues, please contact any member of Constangy's Employee Benefits Practice Group, or the Constangy attorney of your choice. We are
Constangy, Brooks & Smith, LLC has counseled employers, exclusively, on labor and employment law matters since 1946. The firm represents Fortune 500 corporations and small companies across the country. More than 100 lawyers work with clients to provide cost-effective legal services and sound preventive advice to enhance the employer-employee relationship. Offices are located in Georgia, South Carolina, North Carolina, Tennessee, Florida, Alabama, Virginia, Missouri, and Texas. For more information about the firm's labor and employment services, visit www.constangy.com, or call toll free at 866-843-9555