Illinois ERISA Lawyer Blog

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.

With another Chicago summer approaching, good news is in store for its financial executives. Like the outlook of warmer weather ahead, executives' compensation is "warming up," evidenced by fewer salary freezes and more pay increases compared to the past few years.

The Financial Executive Compensation Survey's collection of data recently gathered recognizes an overall improvement in both companies' and executives' individual economic outlooks. In conducting the survey, Thomas Thompson, Jr., of the Federal Executives Research Foundation consulted with more than 1000 corporate executives - with about half of the executives being Chief Financial Officers - who chose to participate in the survey. The survey, released on May 19th, noted a .9% increase in base salary increases in both private and public companies, moving from 2.1% in 2010 to 3% in 2011.

Although private companies boasted an average $2,000 increase in base salary (moving from $204,800 to $206,800) over the past two years, public companies actually witnessed an average base salary decrease of $7,600 ($285,000 in 2010 to $277,400 in 2011) and an overall compensation decrease from $680,407 to $673,831. Thompson, Jr., noted that the decline with public companies was not significant in comparison with the positive economic outlook and may simply reflect the difference in executives participating in the survey from last year to this present year.

Another interesting area of data gathered by the survey involves the participation in both defined contribution and defined benefit plans. Although nearly 69% of executives did not participate in defined benefit plans - one common reason for not participating being the simple fact that such a plan was not offered - nearly 75% of surveyed executives participated in a defined contribution retirement plan with a matching employer contribution of 4%.

It is a great time to be renegotiating your executive compensation package. If you need advice or assistance regarding executive compensation, call an attorney knowledgeable in employee benefits and executive compensation.

Employees in Chicago now have even more reason to know about employer-provided health plans and their rights to reimbursement and subrogation. Should you experience any type of accident or injury caused by another party, you may need to use your own health insurance to cover the medical expenses incurred from the accident until obtaining a settlement from or judgment against the party causing the injury. Invariably, the health insurance company or fund will demand reimbursement for any expenses it covered that were caused by the other party. Following Great-West Life & Annuity Insurance Co. v. Knudson and Sereboff v. Mid Atlantic Medical Services, Inc., plans have become particularly aggressive in seeking such reimbursement. Nobody previously considered your own health plan making a claim against your own automobile insurance policy, though. But that might change after a recent decision from the Sixth Circuit Court of Appeals in Shaffer v. Rawlings Co.

The Shaffer court rejected an employee's claim that ERISA prevented her health insurance provider from enforcing its reimbursement and subrogation rights by demanding funds from the employee's own auto insurer before she had even recovered from any third party for her injuries. The court also rejected the argument that ERISA 502(a) would prohibit the enforcement of a subrogation provision, noting that section 502(a) applied specifically to judicial remedies, not substantive or contractual remedies like a plan's subrogation provision. Ultimately, the fact that an employee does not have possession of the funds does not impede the collection process.

Plans nationwide will likely start to take the sort of action that Ms. Shaffer's employer just did. If other jurisdictions follow the Shaffer decision, this could mean that the unfortunate repercussions related to a car accident may only be further aggravated in the event that an employee has had to have his or her health plan advance money to cover the resulting medical expenses. If you are unsure whether or not your plan provides for an enforceable subrogation agreement in the event of an accident or if you are simply interested in better understanding the rights of both you and your insurer in the event of a non-work related accident, speaking with an ERISA attorney (link to you site) is always a good idea.

Employees covered by employer sponsored health insurance plans often encounter the situation where a doctor or medical staff recommends a procedure, and advises the employee the procedure is covered by insurance, only for you--the employee--to get a denial of claim for benefits letter from the insurer afterwards. Countless of these individuals feel that the denial is the hospital's problem; after all, the hospital staff told you the procedure was covered. And if the hospital wants to be paid, it can fight the insurer. Many individuals wait to contact a lawyer until they are faced with lawsuits by the hospital for unpaid bills. If you wait until then, often there is little any lawyer can do to help.

Several recent cases display just how ERISA governs this three-way battle between the participant, the insurer, and the medical service provider. In IHC Health Services, Inc. v. Fiesta Palms, LLC, No. 2:10-cv-1156 (D. Utah May 24, 2011), the medical service provider tried suing the employer sponsoring a health insurance plan for unpaid bills in state court. The employer transferred the case to federal court arguing the dispute was preempted by ERISA, because it relates to an employee benefit plan. Not surprisingly, the medical service provider will be unable to recover anything in federal court under ERISA because ERISA provides no remedy for medical service providers. Instead, the enforcement statute of ERISA, § 502, details exactly who can bring a lawsuit, and a medical service provider did not make the list.

Also, in Lightfoot v. Principal Life Insurance Co., No. CIV-11-130-M (W.D. Okla. May 24, 2011), a father paid the medical expenses of his son after the employer-sponsored health insurer refused to pay for a procedure. Afterwards, the father sued the insurer under ERISA claiming benefits due, apparently under a theory of subrogation. The court there held only a participant or beneficiary can bring a lawsuit under ERISA § 502(a)(1)(B) for benefits due, and that what the father sought was not within the scope of "other appropriate equitable relief" authorized in a lawsuit brought under § 502(a)(3).

To sum up, if you accept medical services and your plan will not pay for the treatment, it is not the hospital's problem. IT'S YOUR PROBLEM! And you need to do something about it right away. Hospitals will often wait years to sue you for a breach of contract for nonpayment because they want to ensure the statute of limitations on any medical malpractice claim has already run (breach of contract generally has a much longer statute of limitations). And by the time the hospital sues you, you have waited too long to appeal the insurer's claim denial. As soon as you get a notice of claim denial from the insurer, call an ERISA lawyer. Otherwise, you could be stuck with the bill for years to come.

For employees in Chicago, your rights under ERISA continue to change as a result of the Supreme Court's recent decision in CIGNA v. Amara. As discussed in an earlier post, ERISA § 502(a)(1)(B) cannot be used to claim benefits due but for a breach of fiduciary duty where the plan administrator made a misrepresentation about the plan by failing to disclose a material term in the summary plan description (SPD). The Supreme Court made up for it, though, by expanding the scope of relief under § 502(a)(3), permitting participants to seek reformation of the plan to match what the administrator told participants, or to even recover monetary compensation from the administrator under the "surcharge" theory that has the ERISA community buzzing.

One week after its opinion, the Court overturned another portion of the lower court's ruling, one that denied the employees' request to reinstate the pension plan because CIGNA did not disclose key negative elements of its adopted cash balance plan. Now, in addition to following the Court's guidance on fashioning a remedy under § 502(a)(3) pursuant to the Court's May 16th opinion, the lower court will also determine on remand whether that section allows the employees to be reinstated in the previous plan where CIGNA did not comply with an ERISA requirement to disclose all "significant reductions in benefit accruals." ERISA § 204(h).

Essentially, all eyes will be on the lower court in Amara to see how these multiple remedies determinations pan out. If you have experienced any recent changes to your pension plan and believe that you have not been properly notified of the changes, speak with an attorney knowledgeable in ERISA.

My office receives calls daily from employees, executives and managers in Chicago who claim their health insurance will not pay for a procedure. Some of the time, the plan does not even dispute that the claimed treatment or procedure is covered by the plan. So why won't the plan pay? The answer is two words: reimbursement and subrogation. The plan claims that it once paid benefits due to an injury caused by a third party and you recovered for that injury. I have seen plans withhold benefits years after the purported overpayment.

After Great-West Life & Annuity Insurance Co. v. Knudson and Sereboff v. Mid Atlantic Medical Services, Inc., many plans have gotten particularly aggressive in enforcing subrogation and reimbursement rights. Nearly all plans include language to the effect that if the plan pays benefits for an injury caused by a third party, and you recover anything from the third party, by judgment or settlement, then the plan must be reimbursed. They also often state that in enforcing the reimbursement, the plan can withhold future benefits. Personal injury lawyers are familiar with plans asserting liens on judgments in personal injury cases where the plan expended money for health care caused by the third party. But just because there is no lien in your personal injury or workers compensation case does not mean you won't have to pay the plan back someday, especially if the plan is self funded or a collectively bargained multi-employer health plan.

If you have a personal injury or workers compensation case pending in Illinois or the Midwest, the best course of action is to be proactive and learn whether your ERISA covered health plan paid any benefits that can be recovered from the third party. Even if you settle the case for less than your actual damages, the plan could enforce full repayment. Consult an ERISA lawyer sooner, rather than later, and avoid the later hassles of your plan withholding benefits.

Employees covered by a group health or life insurance plan in Chicago have all heard the stories of the insurer that accepted premium payments for years, and suddenly upon receiving a large claim, asserts the employee did not qualify for coverage. Insurance companies consistently got away with this. But after Cigna v. Amara, employees may finally have a remedy against this sort of sneaky conduct.

According to the Supreme Court in Amara, a participant in an ERISA employee benefit plan can "surcharge" a fiduciary for a breach of fiduciary duty. In Amara, the fiduciary failed to disclose a reduction in benefits to the participants in the summary plan description. This of course begs the question: what about the insurer that tells a participant she is covered or pre-authorizes a claim, but then refuses to pay?

The same day the Supreme Court issued its opinion in Amara, a Court of Appeals rendered a decision rejecting an argument made by the Department of Labor as amicus that a participant could "surcharge" the fiduciary for a breach of fiduciary duty under ERISA § 502(a)(3). See McCravy v. Metropolitan Life Ins. Co., No. 10-1131, Slip Op. at8-9 (4th Cir. May 16, 2011). The McCravy court even referenced another cases that did not permit life or other insurance beneficiaries to recover benefits due because the insurer breached its fiduciary duty. But this opinion is now seriously called into question, and the historical unavailability of a remedy to participants suffering from this sort of abuse from insurers has hopefully com to an end!

We expect to see a wave of new cases hit the courts whereby the insurance companies are finally held accountable for misleading participants into believing they have coverage only to be stuck with bills or no benefits later, like previously discussed in the Kenseth v. Dean Health case. If you have been told by an insurance company that a claim is covered, or that you have coverage, and later the insurer refused to pay benefits, speak with an attorney knowledgeable in ERISA.

Employees in Chicago and the rest of Illinois lost another potential remedy in ERISA disputes yesterday, but may have gained others. The Supreme Court issued its opinion in Cigna v. Amara yesterday, which arrested any expansion of a remedy for a claim for benefits due under ERISA § 502(a)(1)(B), but may have expanded "other appropriate equitable relief" under ERISA § 502(a)(3).

Cigna v. Amara concerned an employer's conversion from a defined benefit pension plan to a cash balance plan. The new plan contained "a phenomenon known in pension jargon as 'wear away'". Id. at 8. In a "wear away," employees could be required to work for several years, or 6-10 in this case, for benefits accruing under the new plan to catch up to those existing under the old plan, effectively resulting in employees working for 6-10 years accruing no benefits. Cigna, however, failed to tell this to its employees in the required disclosures.

The employees claimed they were entitled to the benefits due pursuant to the summary plan description, which misrepresented the terms of the plan. This theory, dubbed the "but for" theory, asserts a claim for benefits due under ERISA § 502(a)(1)(B) but for the breach of fiduciary duty. The Supreme Court reasoned that this theory is inapplicable in this case, because the SPD is not the plan or part of the plan--it is a summary of the plan. Moreover, the plan pays the benefits, but the plan administrator is responsible for issuing the plan summary accurately describing the plan.

The Court went on to state that the lower court should consider whether the case is proper for "other appropriate equitable relief," and proceeded to give guidance on that remedy. According to the Court, a court could use § 502(a)(3) to reform a plan, estoppel, or surcharge. The last remedy discussed, however, came as a surprise because courts and defense lawyers have long held the position that monetary compensation was not available under ERISA § 502(a)(3). However, the Supreme Court appeared to bless a case by a participant or beneficiary against a plan administrator seeking monetary compensation under the surcharge theory. Justices Scalia and Thomas concurred in the judgment, stating that this § 502(a)(3) guidance was not necessary to resolve the issue presented to the Court and would not necessarily be precedent in future cases.

We expect the Court's guidance here to be discussed in a currently pending case in the Seventh Circuit Court of Appeals, Kenseth v. Dean Health. If you have questions about your rights to benefits under an employee benefit plan, contact an ERISA lawyer.

Executives in Chicago and the Midwest may be excited to hear about all the General Motors executives suing to recover executive retirement plan benefits from a previously bankrupt employer. Often, when executives have such retirement plans, commonly referred to as SERPs (or "top hats"), the participants can expect to receive little or nothing if the employer becomes insolvent. That is because ERISA § 201(2) top hat plans are exempt from ERISA's funding, vesting, and fiduciary responsibility protections, though are still enforceable as ERISA plans. The General Motors that emerged from bankruptcy assumed much of the pre-bankrupt retirement plan obligations, but the credit agreement with the United States Treasury required that certain obligations, including pension obligations, be reduced.

Like most executives and managers who have such non-qualified deferred compensation or excess benefit plans (ERISA § 3(36)), the GM executives appear to also have been participants in qualified retirement plans at GM, a defined benefit pension plan and a defined contribution stock bonus plan. On Monday, approximately 112 former executives (or their beneficiaries or alternate payees pursuant to a Qualified Domestic Relations Order) sued GM under ERISA § 502(a)(1)(B) claiming a denial of benefits due. The dispute between the executives and GM appears to be over interpretation of a provision in the plan which allows for reducing the SERP benefits by two thirds if benefits exceed $100,000 per year on a single life annuity basis.

The retirees argue that the reduction only applies if he benefits of the SERP exceed $100,000 per year. Meanwhile, GM argues the SERP benefits are reduced when benefits under the qualified retirement plan and the SERP combined exceed $100,000 per year. The language over which the parties dicker states: "for executive retirees who have a combined tax-qualified SRP plus non-qualified benefit under this Plan in excess of $100,000 per annum on a life annuity basis, the amount of benefits under this Plan over the combined $100,000 per annum threshold shall be reduced by 2/3rds." This phrase is certainly open to more than one interpretation, though the question will be whether the administrator's interpretation was reasonable. Also, the use of "combined" just before the second reference to $100,000 appears to present a hurdle to the retirees they did not appear to argue how they clear in any of the internal appeals.

The retirees' interpretation of the plan may very well be the only reasonable interpretation when read in conjunction with other portions of the plan document, in light of amendments to the plan, or pursuant to prior Executive Compensation Committee interpretations of the clause. However, several critical pages of the plan document were omitted from that which was filed, and neither of the other categories of information were attached to the complaint, so we will have to wait to see the outcome! If you have questions about your executive retirement plan, call a lawyer who concentrates in ERISA today.

Policies on clawback of executive compensation in Chicago are not new. Employers have used clawback policies for eons to deter dishonest or fraudulent behavior (bad boy clauses), enforce covenants not to compete, or to recover bonuses following a financial restatement. Following Enron's demise, Sarbanes-Oxley included new laws on executive incentive based compensation clawback, but only applied to misconduct by CEOs and CFOs, and required the incentive based compensation received in the year following the first restated financial statement be repaid. 15 U.S.C. § 7243.

Dodd-Frank, however, will likely impact many more executives than previously implicated under Sarbanes-Oxley. Section 954 of Dodd-Frank requires that, as a condition of the employer's securities being listed on a national securities exchange or association, if the issuer must make financial restatements 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 issuer must make the restatement all amounts paid in incentive based compensation above what would have been paid under the restated financials.

First, Dodd-Frank appears to expand the scope of executive officers to whom it will apply, though it does not define the term. That is left to the SEC and exchanges. A safe bet, though, is that the definition will look something like Rule 3b-7 of the 1934 Act, which would include the president, VP of any principle business unit or function, or any other person who performs similar policy making. Second, the act does not define incentive based compensation, other than specifically including stock options. Again, we can assume this will encompass bonuses and equity based compensation. It will nevertheless be confusing at best to determine what a business unit VP would have received in bonus or stock based compensation under restated financials.

Third, there is a 3-year lookback. But will this retroactive clawback immediately apply, or will the provision only apply to be able to clawback income earned after 2010? Finally, what exactly will the employer do to enforce an alleged clawback? Withhold wages? Withhold SERPs? The tax consequences vary, and vary even more depending on whether any clawback occurs in the same tax year the incentive based compensation was paid, or in a subsequent year.

If you are an executive in a publicly traded company and want to know YOUR rights, not the employer's, under any compensation clawback law or policy, talk to an executive employee benefits lawyer today.

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?" »