Illinois ERISA Lawyer Blog

Executives, managers and employees of closely held businesses in Chicago and all over the country may soon become more likely to own part of their employers. On March 29, 2011 several Congressmen, both Democratic and Republican, introduced H.R. 1244, the Promotion and Expansion of Private Employee Ownership Act of 2011. On April 15, 2011, the bill was referred to the Education and Workforce Committee, the first step on the process before a vote. There is a similar bill pending in the Senate Finance Committee, the Employee Stock Ownership Plan Promotion and Improvement Act of 2011, S. 101. The bills effectively give incentives to owners of closely held businesses formed as a Subchapter S corporation to transfer ownership of the company to an Employee Stock Ownership Plan ("ESOP"), and incentives to lenders who loan the corporation money to purchase the stock from the owner.

Many small businesses structured as Subchapter S corporations have already created ESOPs. But if enacted, the House Bill would make forming an ESOP by an S corporation even more attractive. The bill would allow owners of an S corporation to defer the gain realized on the sale of stock to the ESOP in the same way as currently allowed for owners of C corporations by amending I.R.C. § 1042(c)(1) to define qualifying securities as including those of S corporations, not just C corporations. Moreover, the bill would allow lenders that loan money to an S corporation for the purposes of purchasing the corporation's stock for the ESOP to deduct half the interest received, thereby incenting lenders to participate in these leveraged ESOPs.

Congress appears to have two things on its mind. First, as expressly noted in its findings, "40 percent of working Americans have no formal retirement account at all". Second, with a Baby-Boomer population at or nearing retirement, many owners of small to medium-size are succession planning. There would likely be an abnormally large number of businesses for sale. This may give those business owners increased incentive to pass the businesses along to their employees rather than sell the business on the open market, and incurring immediate tax liability.

We are excitedly monitoring the progression of this bill. With all change comes opportunity, for the better and worse. There will always be a few bad apples in the bunch, With increased benefits to owners for selling their stock to an ESOP, there will undoubtedly increased number of attempts to sell the stock to the employee benefit plan for an inflated price. Luckily, with the pending changes to the DOL's definition of fiduciary, as covered in an earlier post, to possibly encompass valuation experts, this may be mitigated. If you have questions about your employer creating and ESOP, call an ERISA lawyer.

Employees, executives and managers in Chicago and the Midwest receiving disability benefits from their employer's short-term or long-term disability insurance plan often express frustration with one common string attached to those benefits. They complain about how frequently they need to continue to see their doctor when clearly nothing is improving. This begs the question: why would a plan require somebody with a chronic disabling condition to so frequently visit the doctor, when it appears clear the condition is not improving. The reason is often two-fold. First, the plan might make that a condition of you receiving benefits. Second, the claims administrator will pounce on the first hint in the doctor's description of restrictions and limitations to terminate your benefits. There are several things you can do to protect yourself, though.

If you are commencing short-term disability, and expect it to run into a claim for long-term disability, or are receiving long-term disability and expect to need the benefits for quite some time, it would be wise to have somebody thoroughly review the terms of your plan and guide you through the process. Get on a recurring schedule of physician office visits rather than just going upon notice from the administrator that an updated report is necessary. Try to find a doctor that will be sympathetic to your condition, rather than trying to rid himself or herself of any paperwork associated with a disability claim.

You should not assume the administrator knows what it takes to do your job. The administrator will usually hire a vocational expert or vocational rehabilitation counselor, who will not investigate the demands of your job, but will take the title of your job, and look up the description of that job in the Department of Labor's Dictionary of Occupational Titles. This most often affects persons with high-stress positions in management roles. It is a good idea to gather information early in the process, perhaps from friendly co-workers, that describes what the duties of your job were.

A good ERISA lawyer can work with you through the process, rather than just once your benefits have been terminated, to minimize the risk of your benefits will be terminated, or get them reinstated as quickly as possible.

Many employers in Chicago seek for ways to add incentive to their executives and managers. Some accomplish this through Incentive Stock Options ("ISOs"), or Nonqualified Stock Options ("NSOs") depending on the structure of the options package. Other employers may provide a Supplemental Executive Retirement Plan ("SERP"), also commonly referred to in the benefits community as a "top hat" plan, that vests upon a certain number of years of service and/or attainment of certain goals. Yet other employers seek a more direct investment of the executive or manager's "skin in the game" by either providing a bonus that is equity based compensation, or asking the new executive to directly invest in employer stock. Occasionally, the only source of funds the executive will have liquid for such a purchase of stock will be a retirement account that he or she may rollover into the new employer's plan and then buy the stock with the plan assets.

Ever since the implosion of Enron, and decimation of participants' 401(k) accounts that were invested in Enron stock, many people wonder and ask me what the dangers are to the employee of investing plan assets in employer stock, and what the risks are to the employer of offering the employer stock on the menu of investment options. The answers to those questions could consume enough pages to fill a book, to say the least. Nevertheless, you should be careful about investing your nest egg in employer stock, especially anything more than a small percentage.

Recently, such an executive had been hired by a securities brokerage firm, and its bonuses were typically paid in employer stock. Peabody v. Davis, 2011 U.S. App. LEXIS 7449 (7th Cir. Apr. 12, 2011). In order to receive a bonus payment in cash, rather than in stock, the vice president had to invest funds in the stock. The only funds the VP had were in his IRA, which he rolled over into the employer's ERISA covered defined contribution retirement plan, and then used those plan assets to buy the employer stock. Several years thereafter, as a result of the changes of markets' pricing securities to the penny rather than in eighths of a dollar, commissions at such brokerages tumbled and the employer's stock significantly declined in value.

A question arises whether the fiduciaries of the plan breach their duty of prudence by offering employer stock on the menu of investment options, but generally the choice is presumed to be prudent under Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995). Allowing even a heavy investment in employer stock generally will not violate the fiduciaries' duty to diversify the plan assets in the case of Eligible Individual Account Plans, such as that in Peabody. But where there is a significant decline in the value of the employer stock, there will likely be a decision of questionable prudence by the fiduciaries to continue offering employer stock on the menu of investment alternatives.

If you with equity based compensation, or are investing retirement assets in employer stock, consult an ERISA lawyer.

Educators and involved parents in Illinois will be closely monitoring the development of the pending Illinois legislation, introduced by State Senator Kimberly Lightford (D-Maywood). According to news sources, the bill appears to have widespread support, fueled by the momentum of similar measures taken in Wisconsin, Indiana and Ohio, passed 59-0 in the State Senate. The bill also appears to have the support of major teachers unions as well, the Illinois Federation of Teachers, the Illinois Education Association, and the Chicago Teachers Union. Senate Bill 7 purports to do several things: tie tenure to performance; ease the process of dismissing a tenured teacher; allow school reductions in force (commonly called RIFs) to look to a teacher's performance reviews over the previous two years as a measure of pecking order, with seniority acting as a tie breaker; and require teachers and administration to seek arbitration before any strike.

This bill is largely lauded as putting children first and ensuring the best teachers stay in the classroom. But is that what this bill is really about? The elephant in the room--amidst the State's financial crisis and pension underfunding--is that the most major effect of, and apparent intention behind, this law is slashing the cost of funding the pension plans. The State has consistently reneged on its obligation to contribute to teachers pension funds. The Illinois Teachers Retirement System only attained a funding level of 63.8% in 2007, compared to over 100% on average for private single-employer defined benefit pension plans, as described in an earlier post. In 2010, however, that funding ratio for the TRS dropped to less than 50%. That means if the plan terminated today, it would only have enough money to pay half the accrued benefits.

The State appears to curb the continued employment of more senior educators. Why? The more senior teachers earn high salaries, but the annual payroll is a greater concern to school district administrators than the State. The State, on the other hand, is very concerned about its annual obligations for contributions to the pension plan.

The annual accruals of benefit liabilities for participants ramp up dramatically in the later years of service as both compensation and the Final Average Earnings upon which the promised benefit is based increases. Each year a participant gets more senior and earns a high salary, the greater annual accrual of benefits, but also the greater make-up accrual for past service years where the accrual was based on that year's compensation.

Continue reading "Is the Pending Illinois Legislation Education Reform or Educator Pension Reform?" »

Employees, executives and partners in Chicago who make elective deferrals to an employer-sponsored 401(k) retirement account are undeniably trying to save for retirement. Assuming the plan participant elects to put money into the plan, there will generally be two variables that will determine the size of the account balance upon the participant's retirement: the rate of return of the assets in which the account is invested, and the amount of fees and other deductions taken from the account. Quite naturally, the participant wants to maximize the return while minimizing the fees.

Fortunately plan fiduciaries, as defined in ERISA § 3(21), specifically are charged with exercising their duties regarding the plan in the sole interest of participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses. ERISA § 404(a). The employer must, therefore, try to pay only reasonable expenses, not excessive fees from plan assets. As with most issues of fiduciary responsibility in ERISA, it is less important what the ultimate result is and more important how the fiduciary arrived at it.

Many plan sponsors renegotiate their fee structures with service providers periodically. But if the sponsor is content with a service provider, the plan sponsor may renegotiate the service contract every few years, but be reluctant to change that service provider, for it does a good job. Some plan sponsors even retain a consultant to advise on the reasonableness of fees the sponsor allows the plan to pay for services. Certainly, this measure is more prudent than going it alone, though it comes at a cost to the employer. But is relying on a consultant's advice that fees are reasonable enough for the plan fiduciaries? A divided panel of judges on the United States Court of Appeals for the Seventh Circuit appear to demand more.

In George v. Kraft Foods Global Inc., No. 10-1469, at 26 (7th Cir. Apr. 11, 2011) (Slip Opinion), the court reversed a district court's entry of summary judgment in favor of the defendants. The class of plaintiffs in that case advanced a claim, among others, that the plan fiduciaries caused the plan to pay excessive fees to its recordkeeper, Hewitt. Hewitt had been the plan recordkeeper for 11 years before the lawsuit had been filed. While the evidence showed the defendants had renegotiated the plan's service agreement with Hewitt upon the conclusion of the term of each contract, there was no evidence that the plan fiduciaries ever solicited competitive bids for the recordkeeping service contract with the plan. The defendants stressed that they hired independent consultants who advised the fiduciaries that the fees they allowed the plan to pay Hewitt were reasonable.

Continue reading "Is Your Employer Shopping Service Providers to Ensure the 401(k) Plan Pays Competitive Rates?" »

Workers in Illinois and the Midwest may be stunned in disbelief at the notion that payments to their children from the Social Security Administration could reduce the workers' benefits under a disability insurance policy. Most--if not all--long-term disability insurance plans provided through employment and covered by ERISA contain certain offsets. The plan will calculate the monthly benefit based upon a percentage of pre-disability earnings, but then reduce those benefits if the disabled participant receives any Social Security disability benefits. Many such plans will even provide the participant with all the necessary paperwork to apply for such benefits, and in some cases even a referral to an attorney who will handle the claim before the Social Security Administration.

After commencing payment of benefits to participants, some disability insurance plans have later demanded either a refund for overpayment of benefits on account of these offsets, or withhold future payments to make up for the supposed overpayment. How could a plan demand an offset for benefits paid to somebody else, though? The answer is that it depends on the language in the plan.

Several such disability plan participants recently experienced this in Schultz v. Aviall, Inc. Long Term Disability Plan, 2011 U.S. Dist. LEXIS 37125, at *10 (Apr. 4, 2011). In that case, the plan provided the monthly disability benefit could be reduced by several different types of "deductible sources of income", included amounts received by either the participant's spouse or children for "loss of time disability payments because of [the participant's] disability under [Social Security]". Id.

There, the claimants--suing on behalf of a class of similarly situated individuals and on their own behalf--argued that Social Security payments to the participant's children for the participants' disability did not constitute "loss of time" payments. The court, unfortunately, disagreed. If you have submitted a claim for disability benefits, or anticipate doing so, and need advice concerning whether there may be any offsets to your benefits, consult an ERISA lawyer.

Employees, executives and partners in Chicago may wonder how a clause in a health insurance plan or disability insurance plan may still contain a clause granting the insurance company discretion to construe the terms of the plan and make benefit determinations. As covered in a prior post, Illinois bans the use of such discretionary clauses in health insurance and disability plans. The catch, however, is that courts have held the insurance regulation banning such clauses--50 Ill. Admin. Code § 2001.3--only applies prospectively, that is to plans issued or renewed after July 1, 2005. Garvey v. Piper Rudnick LLP Long Term Disability Insurance Plan, 2011 U.S. Dist. LEXIS 31592, at *4 (March 25, 2011).

Determining whether an insurance plan was issued after the applicable date is easy. More difficult is determining when the plan has been renewed. One may be tempted to assume that the insurance policy renews every year. After all, employees must submit their elections for open enrollment every fall for the following calendar year. In practice, most health, accident, disability or term life insurance policies do renew every year. Whole life insurance policies, on the other hand, do not renew annually because they are longer duration contracts. But according to at least one federal judge in Chicago, the plan only renews if there is an amendment to the plan. Id. at *6-7. The court did not explicitly explain what would need to occur for such an amendment to take place, but apparently the disability policy in the Garvey case did not renew annually. The disability insurance plan was issued on January 1, 2001, and the court held it had not been renewed prior to the final denial of disability benefits on January 5, 2006. In at least what appeared to be a counter-intuitive holding, readers of the opinion can only be left wondering what the court would require to hold a policy renewal occurred.

If you have been denied disability or health insurance benefits and need assistance in determining whether the plan has an enforceable discretionary clause, consult a lawyer versed in ERISA.

Employees, executives, retirees and soon-to-be retirees in Chicago participating in a single-employer defined benefit pension plan may encounter unpleasant benefit restrictions because of plan underfunding. According to a study by Mercer, in 2007 large employers' pension plans were over 100% funded. Just three years later, in 2010, the same test group of plans were only 73% funded. Following the passage of the Pension Protection Act of 2006, which took effect in 2008, certain benefit restrictions would begin to apply to some underfunded plans, with the various restrictions depending on the funding level.

For purposes of benefit restrictions, the funding level is derived from the Adjusted Funding Target Attainment Percentage ("AFTAP"), defined in I.R.C. § 436(j)(2). The Internal Revenue Code proscribes a complex scheme of applying presumed AFTAPs, until the plan provides an actual AFTAP certified by an enrolled actuary. An employer may not amend the plan in a way that would increase benefit liabilities if the AFTAP is below 80%, or the amendment would cause it to dip below 80%. Id. § 436(c). Also, plans less than 80% funded will become subject to partial payment restrictions, limiting accelerated payments (e.g., lump sum distributions) to half the value of the benefits. Id. § 436(d).

Plans funded less than 60% can pay no accelerated benefits. Id. In these cases, the participant will be forced to leave the money in the plan, except for a monthly annuity distribution based on a single life expectancy. Plans under 60% funded also must freeze the annual benefit accruals of participants still working. Id. § 436(e). These under 60% funded plans also may not pay any "unpredictable contingent event" benefits, commonly dubbed plant shutdown benefits. Id. § 436(b).

Continue reading "Pension Plans Subject to Benefit Restrictions Following the Pension Protection Act of 2006" »