Illinois ERISA Lawyer Blog

Executives in Chicago and the Midwest, especially working for small to mid-size employers, often negotiate into their employment agreements some form of deferred compensation and/or severance compensation. Until the relationship between executive and employer sours, the parties only think about the tax considerations of executive compensation. But when there is a dispute between employer and executive, and the executive must take measures to enforce the agreement, the question becomes whether the compensation is covered by ERISA or not. Results are mixed, and always turn on a fact specific inquiry. Consequently, there are no hard and fast rules.

One such executive recently filed a complaint in state court and faced a motion to remove to Federal court under ERISA by his former employer. See Hoffner v. Bank of Choice Holding Co., No. 11-266 (D. Colo. June 21, 2011). In that case, the bank entered into an "Executive Salary Continuation Agreement" with Mr. Hoffner, whereby the bank would pay Hoffner $50,000 for ten years upon retirement and reaching age 65. But if Hoffner voluntarily terminated his employment prior to reaching age 65, he would receive the balance of an accrued liability account--an unfunded account maintained on the bank's books recording a liability to pay Hoffner's post-retirement compensation. But nothing in the record suggested how the bank accrued the liability, whether on a straight line method or otherwise. The agreement only provided that the bank would place "appropriate reserves" in the accrued liability account.

The court ultimately held the parties' deferred compensation agreement did not meet the definition of an ERISA-governed plan. The court applied the element test of the seminal case, Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982). The court held the intended benefits were not reasonably ascertainable, there was not a reasonably ascertainable class of beneficiaries, and there was not a sufficient ongoing administrative scheme (see Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987)). The court rejected the bank's argument that only the kind of benefits should be reasonably ascertainable, rather than the amount. Also, nothing suggested these benefits were provided to a class of beneficiaries--they were only provided to this one employee. Note, however, that other courts have held there could be a "class of one." Finally, without illuminating its rationale, the court held this agreement did not provide benefits "whose provision by nature requires an ongoing administrative program to meet the employer's obligation." Siemon v. AT&T Corp., 117 F.3d 1173, 1178 (10th Cir. 1997).

If you have questions about how to enforce provisions of your executive employment agreement or benefit plan, contact a skilled ERISA lawyer.

Employees in Chicago and the Midwest often call my office and inquire about the "conflict of interest" in ERISA long-term disability cases. Few cases will be determined based on whether there is a conflict of interest, as insurers have become more clever at creating an appearance of there being no conflict of interest. But the best way to understand how the conflict applies in cases is to witness it changing the outcome of a case.

In 2008, the United States Supreme Court held that where an ERISA plan administrator (such as an insurance company) both evaluates and makes benefit determinations, and is the source of funding to pay the benefits, the administrator is under a structural conflict of interest that should be weighed in judicial review of whether the administrator abused its discretion. Metropolitan Life v. Glenn, 554 U.S. 105 (2008). That does not necessarily mean the abuse of discretion standard will not apply; it just means a reviewing court will consider that conflict of interest. But something more than just the existence of the structural conflict usually needs to be shown. A claimant needs to show what else the insurance company did that shows that conflict of interest altered the administrator's benefit determination. A perfect example of this was in a recent (unpublished) decision from the United States Court of Appeals for the Ninth Circuit.

In Letvinuck v. Aetna Life Insurance Co., Aetna was the administrator of the Boeing Company Employee Health and Welfare Benefit Plan, and also funded the long-term disability benefits. No. 10-55018 (9th Cir. June 22, 2011). Aetna gave no weight to the fact that the claimant had been awarded disability benefits by the Social Security Administration, and did not try to address why the ERISA benefits were not payable despite Social Security benefits being awarded. Next, Aetna failed to tell the claimant what else she would need to show in order to be approved for the benefits. The court called this failure to "engage in meaningful dialogue" with the claimant and failure to let her know what evidence the insurer required. Because the claimant could point to these facts, the court then gave weight to the conflict of interest, viewed the denial with skepticism, and ordered the insurer to pay the benefits.

If you still have questions about how a conflict of interest can affect your right to disability benefits, speak with an ERISA lawyer.

Crain's Chicago Business published an article today about Chicago-based ComPsych Corp. executing several new agreements worth tens of millions of dollars with employers nationwide to provide employee assistance programs ("EAPs"). The article references how during difficult economic times, employees utilize these programs more. There is a greater onset of alcohol or substance dependence. Likewise, these EAPs have expanded to include counseling for managing marital problems, stress and obesity. I highly praise these programs for helping employees manage difficult problems. However, a central purpose of these programs is still to help employers by mitigating the extent to which life's obstacles decrease employee productivity. While many of life's obstacles are of the sort that can and should be properly addressed with an EAP, often executives, professionals and other employees overlook the employer's disability insurance plan. Sometimes, an employee may be a better candidate for disability leave than for assistance under an EAP.

Employees are usually aware they have a disability insurance plan, but rarely know exactly what that insurance plan covers, in what circumstances, how much it pays, for how long, and what (if anything) is excluded. Disability plans typically will provide most income replacement while you are "totally disabled" (as defined in the policy) or "partially disabled" (if your plan or policy provides for partial disability--some do, and some do not). Partial disability benefits will apply where you work a reduced schedule because of the condition and earn less money. Depending on the policy language, the plan may then supplement some or all of your reduced earnings. Disability plans often require that you be under the care of a physician in order to receive benefits. They also usually contain some sort of a 24-month limitation on benefits paid where disability is due to a mental condition or disorder (e.g., depression).

Not all claims for disability benefits are as a result of a physical disability. Executives and professionals often face high-stress in their jobs, which adds a unique vocational and/or medical element to a disability claim. When adding in life's other obstacles to your already high-stress, high-demand job, an EAP program may be the right way to go. But if you feel like you need more relief, or perhaps cannot work (albeit temporarily), then maybe disability is right for you. If you want to know about your options and rights under your employer's disability plan, call a lawyer knowledgeable in ERISA.

Executives, professionals and other employees in Chicago frequently call my office to ask what the statute of limitations is in an ERISA case (i.e., the measure of how long the potential claimant has to file a lawsuit under ERISA). Depending on the type of case, employees can end up more confused after asking that question than before. One recent case discussed when a claim accrues (i.e., the clock on the applicable statute of limitations begins ticking) in the context of a cash balance plan that paid lump sum distributions pursuant to an illegal plan term that set the actuarial value of the distribution.

In Thompson v. Retirement Plan of S.C. Johnson & Son, Inc., No. 10-3917 (7th Cir. June 22, 2011), the United States Court of Appeals for the Seventh Circuit held that the limitations period began running when participants received their lump sum distributions from the employer's cash balance plan. Under a cash balance plan, participants receive "interest credits", rather than investment returns on their account balances. The interest credit was 4%, or 75% of the plan's rate of return on its investments. If a participant stopped participating early, though, the participant could take a lump sum distribution at the present "actuarial equivalent" value of what the participant would have received at age 65. ERISA law dictated how to calculate the "actuarial equivalent" as a value discounted by the 30 year Treasury rate. The plan sought to use the same 30 year Treasury rate to calculate the future accruals, rather than the 4% or 75% of plan rate of return.

The plan defendants claimed the statute of limitations should have begun running when the plan sponsor disclosed this in Summary Plan Descriptions as early as 1998 or 1999. The court disagreed. An "ERISA claim accrues when a plaintiff knows or should know of conduct that interferes with the plaintiff's ERISA rights." Young v. Verizon Bell Atlantic Cash Balance Plan, 615 F.3d 808, 817 (7th Cir. 2010). But in this case, the SPDs did not sufficiently put the employees on notice of the illegal way the plan would calculate the future interest credits a participant would not earn by taking an early distribution. The court called the various SPDs "a collection of hints". Thompson, Slip Op. at 12. Therefore, the statute of limitations began running when the plaintiffs actually took their lump sum distributions.

The actual limitations period in that case was 6 years. ERISA only provides for a statute of limitations for breaches of fiduciary duty--6 years, or 3 years from when the plaintiff has knowledge of the claim (though exactly of what the plaintiff must have knowledge differs across jurisdictions). The limitations period for benefit claims under ERISA § 502(a)(1)(B) will be, in the absence of a shorter period written in the plan, the most analogous limitations period in state law, which is usually the statute of limitations for breach of a written contract. The Thompson case originated in Wisconsin, which provides for a 6-year statute of limitation.

If you feel your retirement plan has miscalculated your benefits, consult an experienced ERISA attorney right away.

Employees that participate in group health insurance or group disability insurance plans through their employers obtained another victory today. The United States Court of Appeals for the Ninth Circuit held that participants who bring claims under ERISA § 502(a)(1)(B) for benefits due under the terms of the employee benefit plan may sue the third party insurer--the insurance company from whom your employer buys insurance for the particular benefit plan--for those benefits.

In Cyr v. Reliance Standard Life Insurance Company, Ms. Cyr received disability benefits under the employer's disability insurance plan insured by Reliance Standard. She sued her employer, alleging it discriminated against her by paying her approximately half of what it paid male employees with similar qualifications. Cyr prevailed, and won a retroactive salary increase. She then demanded Reliance Standard increase her disability benefit payments to reflect the retroactive higher salary, but it refused. Cyr sued Reliance Standard for the increased benefits, but the insurance company was neither the plan, nor the plan administrator.

The District Court initially dismissed Cyr's case, following the precedent of previous Ninth Circuit caselaw which held only the employee benefit plan or the plan administrator could be proper defendants in an ERISA 502(a)(1)(B) lawsuit. The Court of Appeals initially affirmed that decision, but after rehearing the case en banc (i.e., before all the judges), it vacated its prior order and reversed the District Court's ruling.

The prior law limiting benefits claims to being brought against only the plan or the plan administrator is not supported by a reading of the statute. ERISA specifies who can bring a claim in § 502, but does not limit against whom a claim may be brought. Previously, the Supreme Court in Harris Trust and Savings Bank v. Salomon Smith Barney, Inc. held a participant may sue a non-fiduciary for "other appropriate equitable relief" under ERISA § 502(a)(3).

If you have any questions about who is supposed to pay your health insurance or disability insurance benefits, call an ERISA lawyer.

Employees in Chicago that are participants in any employee benefit plans should pay attention to the growing divide among Courts of Appeals over whether "satisfactory to us" is language in a plan sufficient to vest the plan administrator with discretion to interpret plan terms and make benefit determinations. When the administrator has such discretion, a court reviewing the administrator's decision will do so under an abuse of discretion standard--whether the decision was reasonable, not whether it was right.

The United States Court of Appeals for the Third Circuit joined the ranks of courts in holding such language requiring a participant to provide proof of a loss "satisfactory to us" does not confer discretion on the administrator of the plan. Viera v. Life Insurance Company of North America, No. 10-22810, Slip Op. at 19 (3d Cir. June 10, 2011). The Third Circuit joined the ranks of the Second, Seventh, and Ninth Circuits in holding that this sort of language does not clearly communicate to a participant that the plan administrator has discretion in administering the plan.

The Court of Appeals for the Seventh Circuit--located in Chicago--held this sort of language cannot vest the administrator with discretion back in 2005. Diaz v. Prudential Life Insurance Company of America, 424 F.3d 635, 637 (7th Cir. 2005). However, employees cannot take these holdings for granted. When there is a divide in courts of appeals such as the one present here, it is more likely the Supreme Court will allow an appeal in order to resolve the conflict.

If you have any questions about how a standard of review or a discretionary clause could impact your claim for benefits, consult a lawyer knowledgeable in ERISA.

Employees of privately held companies in Chicago and the Midwest have tremendous opportunities and risks ahead, as the baby-boomers who own those companies get set to retire. Generally, an owners of a privately held business has two choices when it comes time to retire: pass the business on to a family member, or sell it. Passing the business on to a family members is often not feasible. Many of these baby-boomers built the sort of business that required a lot of elbow grease. Meanwhile, they sent their children to the best schools and encouraged them to pursue other sorts of careers: accounting, finance, medicine, law, etc. Therefore, the boomers will look to sell those businesses. But as there likely will be more boomers retiring in the next decade than entrepreneurs looking to buy the businesses, selling the business to the employees via an Employee Share Ownership Plan (ESOP) will likely become more commonplace. If you are an employee in such a company, that sounds great so far, right?

The answer depends. ESOPs usually get billed as tokens of generosity: a means for a benevolent owner to pass the legacy on to employees. But often the true purpose is one of corporate finance: a means for the owner to liquidate a holding in the company. Danger lurks in ESOPs where the outgoing owner sets up the ESOP and also serves as a trustee of the plan at the time the ESOP will decide what price to pay for the stock to that very same owner. Not surprisingly, many such business owners have been caught doing just that before.

The Department of Labor just obtained several consent judgments against ESOP trustees in a case where the DOL alleged the trustees paid over $60 million for company stock only worth about $18 million. See Solis v. Mattingly, No. 2:09-cv-00207-WOB (E.D. Ky).

This particular ESOP affected over 5,000 employee participants, causing them losses, but similar transactions will become more likely on a smaller scale, and they have been alleged in larger scales as well (e.g., the lawsuit against the famed real estate mogul turned Chicago Tribune owner, Sam Zell). For instance, the business with 20 employees, 50 employees, maybe even 100 employees could easily become the next plan sponsor of an ESOP that pays inflated prices for company stock. If you are on of the participants in a company that recently set up an ESOP, you should ask several questions. Are the individuals who are selling the stock also running the ESOP? Who performed the valuation of the company stock? How did the valuator arrive at that number? Privately held companies are more difficult to value than publicly held companies, because there are no shares traded on securities exchanges.

Because of the potential for such abuse, the IRS has even issued guidance recently with respect to S Corporations sponsoring ESOPs. If you are a participant in an ESOP, and you think the plan may have paid too much for employer stock, speak to an ERISA lawyer today.

Executives in Chicago may be puzzled to begin seeing vague references to new compensation clawback policies in their executive employment agreements. Section 954 of the Dodd-Frank Wall Street Reform Act requires, as a condition of the employer's securities being listed on a national securities exchange or association (such as NYSE, NASDAQ, etc.), if the employer must restate any financial statements because of "material noncompliance" with the securities laws, then the issuer will recoup from any current or former executive officer during the 3 years preceding the date the employer had to restate those financial statements all amounts paid in incentive based compensation that exceeds what would have been paid under the restated financials.

Executive Compensation lawyers who advise employers mostly agree the executive employment agreements need to mention the clawback policy. However, the employers' lawyers advise to avoid being specific about the terms of the clawback policy in the employment agreement because as the Securities Exchange Commission issues regulations under Dodd-Frank, those policies will likely be amended or updated.

As the executive, however, you want to know what is in that clawback policy. You also want your agreement to delineate whether you are one of the executives to whom Dodd-Frank will apply. Though the SEC has not yet issued regulations defining the term, most believe the definition will either mirror or closely resemble that found in Rule 3b-7, which includes the President, VP of any operating division, or anybody else with similar policy making authority.

If you are an executive of a publicly held company and have questions about the Dodd-Frank Wall Street Reform Act or about your employment agreement, call an Executive Compensation lawyer.

Executives and employees participating in employee benefit plans in Chicago received a reminder this week about why it is important to keep track of your benefit plans' beneficiary designations, and update those designations when appropriate. Many people may think they can enter into binding agreements with others, such as family members or former spouses, about entitlement to or waiver of benefits under an employee benefit plan, like a pension or life insurance. However, if the plan is one covered by ERISA, those agreements, even if part of an agreed court order, will have no bearing on what the benefit plan administrator does with any proceeds if inconsistent with the beneficiary designation.

The United States Court of Appeals for the Seventh Circuit reiterated this point in Jackman Financial Corp. v. Humana Insurance Co., No. 10-2112, Slip Op. (7th Cir. May 31, 2011). In that case, Mr. Torrence was a participant in a group term life insurance policy offered through his employer, and named his brother as the sole beneficiary. Mr. Torrence and his brother both died in the same car accident, at the same time. Mr. Torrence's mother, the executor of his estate, contracted with Jackman Financial for Jackman to finance the funeral, and accept assignment of the life insurance proceeds in return. The policy, however, contained a clause granting the administrator discretion to name a beneficiary from a class of family members in the event the named beneficiary died at the same time as the participant. Jackman Financial sued, alleging it had a right to the money. The District Court entered judgment in favor of the insurer, and the Seventh Circuit Court of Appeals upheld the decision.

Plan administrators, such as Humana in this case, have an obligations to follow the terms of the employee benefit plan. ERISA § 404(a)(1)(D). This case may not appear to present such an injustice, but it is a reiteration of Kennedy v. Dupont, No. 07-636, Slip. Op. (S. Ct. 2009). There, a state domestic relations court entered a qualified domestic relations order (QDRO) acknowledging a former spouse's disclaimer of any interest in her ex-husband's employer-sponsored retirement plan. However, the participant never removed his former wife's name from the beneficiary designation on file with the plan administrator. After the participant passed away, his children demanded the retirement plan's assets because the former spouse waived her interest. The administrator, however, administered the plan according to the documents and instruments on file--which included a beneficiary designation naming the former spouse. The children thus could not recover the proceeds from the plan.

The same thing happened this past week in the Jackman case, though admittedly in a less sympathetic fashion. However, it demonstrates the importance of monitoring your beneficiary designations, because the plan administrator will not try to figure out your true intentions if you pass away; it will distribute funds to whomever you last designated. If you need advice about your employee benefit plan, call an ERISA lawyer.