Connecticut Employment Lawyer & Attorney : Daniel Schwartz : Stamford, Hartford New Haven, CT

The Employee Benefits blog has a terrific post this week explaining the "Gross Misconduct" rule for COBRA Coverage.

For those unfamiliar with the lingo, The Consolidated Omnibus Budget Reconciliation Act (COBRA) (among other aspects) describes rights that employees have to continue their health insurance after their employment as been terminated (and for some other reasons too).    But there is an exception: When the employee is terminated for "gross misconduct", the benefits cease.  What does that mean? Well, the Act doesn't define it.

But the Employee Benefit blog shares some insight from one case about what it means. 

Three things are very important about this decision.  First, the court did not find that any “criminal” conduct was required to meet the “gross misconduct” definition.  Gross misconduct can be an intentional, deliberate, extreme and outrageous that “shocks the conscience.”  It can be “reckless or in deliberate indifference to an employer’s interests.”  ...

Second, the employer has the burden of establishing the termination was for “gross misconduct.”  ... It must be the primary reason, not one of many.

Finally, the employee and potential COBRA beneficiaries have to be notified of the determination that COBRA is not being offered because of the termination for gross misconduct.  

So what's an employer to do? The blog suggests some thoughts, but I'll share some general observations as well.

1. Document, document, document.  If an employer is going to claim "gross misconduct", there ought to be ample documentation supporting the decision.

2. Make sure the termination documents reflect the actual reason and the reason amounts to "gross misconduct".  Meeting this standard is difficult and courts will understandably look to any reason to deny it. Having a letter of termination that merely states the employee was let go for "performance" reasons, isn't going to cut it. 

3. Follow policies and COBRA to the letter. The requirements, for example, about notification under COBRA are strict. Missing deadlines or not providing information may provide the escape hatch that might not be available otherwise.

And as always, seek some legal guidance on this. Denying COBRA nowadays is rare; if an employer does try to use that provision, it can be assured that a fight about coverage may not be too far behind.

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Nothing like a U.S. Supreme Court case on employee benefits to get the blogs to come alive.  And yet, for some reason, I've had difficulty getting exciting about a case decided this week.

First, for those whose kids have been on vacation this week, a recap from Michael Moore of Pennsylvania Employment Law Blog.

The United State Supreme Court ruled that ERISA allows individual claims by plan participants for breach of fiduciary duty that result in losses to an individual account rather than only to the entire plan. In LaRue v. DeWolff, Boberg, & Assoc., Inc., an employee brought an ERISA claim against his employer who was the plan administrator of a 401k plan. The employee claimed $150,000 in losses to his 401k account caused by his the failure to make the changes the employee directed in the investments held in his account. The employee claimed that the failure to make the changes was a breach of fiduciary duty under ERISA. The Court noted the change in the retirement plan landscape from defined benefit plans to defined contribution plans necessitates the recovery of fiduciary breaches in a participant’s individual account. The Court did not decide whether the employer breached its fiduciary duty.

But will this lead to a slew of meritless lawsuits, as some predict? Count me in the group as "not yet convinced" and still puzzled whether this will truly impact 401(k) administration. 

Why? Because while the court did open the door to more lawsuits -- probably on a  breach of fiduciary duty claim -- on an individual basis, the standard for proving such lawsuits remains the same and still high. Without being too technical, a participant in a breach of fiduciary duty case needs to show, for example, that the plan did not discharge its duties with the same "care, skill, prudence, and diligence" that a prudent person would use under similar circumstances.

In the LaRue case, the court didn't even decide whether the plan acted prudently or not, since it sent the case back down.  But I believe the facts alleged seemed so outrageous (plan refuses to abide by participants instructions) that the court couldn't turn a blind eye to an outcome that would allow the plan to avoid liability entirely.

Stephen Rosenberg of Boston ERISA & Insurance Litigation Blog raises some other head-scratching questions:

Does the majority’s heavy emphasis on the fact that LaRue concerned a defined contribution plan hint at a belief among the majority that, in fact, ERISA needs to be treated as an organic, evolving body of law that needs to shift from its past precedents to account for the rise of defined contribution plans? And if so, is the emphasis on this point in the majority’s opinion a subtle suggestion to lower courts to approach new issues brought before them concerning defined contribution plans - or even old issues never before resolved under defined contribution plans - with an eye to how ERISA should develop to fit those types of plans?

These are, to be sure, interesting and noteworthy points worth debating in the intellectual discourse about the case.

However, from a practical perspective, I'm not sure much will change for 401(k) plan administrators. They have had to act and should continue to act prudently in administering the plan.  If anything, they should recognize that their decisions may be under more of a microscope than in the past. But for those plan administrators who have always acted under a microscope and been cautious in their decision-making processes, the LaRue decision isn't going to change the way they act.

So, let others debate whether individual lawsuits under 401k are a good or a bad thing. While they are doing that, employers can refocus their efforts to make sure that their 401k is being properly administered either by them or a company hired to make such decisions.

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Lawyers representing the class of retirees from CIGNA will argue that their clients are entitled to "hundreds of millions" of dollars in retirement benefits as a result of misrepresentations made by CIGNA, according to a report in yesterday's Hartford Courant. 

The Courant -- which finally reported on the decision 5 days after it came out and well after we posted on it  -- barely mentions the argument of whether the new cash balance plan is age discriminatory (which the court found it wasn't). Instead, it focuses on the fact that CIGNA failed to mention that the benefits could be subject to "wear-away". 

Eager to claim victory, the class representative attorneys now say that the disclosure argument is vitally important to the case:

Friday's ruling will serve as "an excellent blueprint for other courts to scrutinize these disclosures" that companies make concerning conversion to cash balance plans, said Tom Moukawsher in Hartford, co-counsel representing the CIGNA employees. "This court decision is a precedent for looking at the underbelly of the disclosures for basic honesty."

Certainly the court was disturbed by communications by CIGNA. For example, in a Newsletter discussing the changes, the Court found that: "nothing in the Newsletter indicated to plan participants that their rate of benefit accrual might decrease, much less by a significant margin. And yet that is exactly what happened." (Decision at 80.) Indeed, as the Court said later:

Taking all of this information into consideration, the Court concludes that CIGNA was aware of the significant reduction in the rate of future benefit accrual that would affect at least a substantial proportion of its employees as a result of the transition to Part B, that CIGNA wished to avoid the employee backlash likely to result from a thorough discussion of these aspects of Part B, and that CIGNA sought to negate the risk of backlash by producing affirmatively and materially misleading notices regarding Part B. As a result, its § 204(h) notice failed to meet ERISA's stringent standards.

As I indicated previously, both parties have until March 17th to brief the issue of what the appropriate remedy would be in this situation. 

Although the lawyers for the class have reason to be pleased with the decision, certainly CIGNA and other companies nationwide must be relieved that the underlying conversion from a defined benefit plan to a cash balance plan itself has been upheld.  If the court had found that the conversion was discriminatory, it could have had an impact nationwide; the decision here may have a more modest impact given the evidentiary findings of the court that are particular to this case.

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My post from last Friday's ERISA decision in Amara v. CIGNA Corp. has drawn quite a bit of interest. Since my post over the holiday weekend (from vacation) was intended merely as a brief summary until this week, it has drawn sufficient attention that a few points bear further elaboration, including disclosure of my knowledge of one of the class representatives.

• First, I know one of the named class representative as a longtime family friend. Other than being aware generally of her involvement, we haven't discussed the case in any specifics and I didn't discuss the decision with her either.  I don't believe this impacts my reporting of the case but readers should be aware of that fact.
  
  
• Second, in my discussion of the age discrimination claim, one reader has suggested that I may have oversimplified the judge's rationale. I can't dispute that since, after all, I'm attempting to reduce a 122 page decision to a few paragraphs.  I did not, for example, discuss whether this case suggests "that more and more courts are buying into the Easterbrook line of argument that cash balance plan conversions are generally not age discrimination" as Workplace Prof did.  As I have suggested, however, readers should review the entire decision for its analysis.  But this additional quote from Judge Kravitz bears review too:
  
             Finally and importantly, the Court agrees with CIGNA that what Plaintiffs see as age
  discrimination is merely the transition from one plan that was heavily age-favored to another plan that is still age-favored but less so. In the Court's view, that transition is not age discrimination.
  
  
• Third, in my discussion of the remedies that may be appropriate, I pointed out that the court suggests at one point that only injunctive relief may be appropriate against CIGNA (versus the plan administrator) in one of the claims.   It is hardly conclusive, however, and it may be that the court fashions a remedy that is more far-reaching on the notice and disclosure provisions.  The court left a discussion of remedies (i.e. damages) for further briefing.  There are also individual claims that need to be resolved as well.
  

The Pension Protection Act blog has another discussion of the case with some additional points that bear review.  And to review other original source documents, readers can go to  Attorney Stephen Bruce's webpage on the actual lawsuit as well.   And for readers that may question whether the attorneys, like Stephen Bruce, did their job well, I'll quote directly from the judge's opinion:

Counsel for each side distinguished themselves throughout this case by their skillful advocacy, professionalism, and civility. The Court is grateful to each of them.

The decision has lots of little items like this to review.  The best thing about a blog like this is that readers can and should decide for themselves what it ultimately means.

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Difficult, time-consuming, and expensive litigation with uncertain results – such as this case represents – is assuredly not a sensible way to manage the Nation's retirement system for either employers or employees. Sadly, at least for now, litigation appears to be the only option available to them.

In a 122 page opus on ERISA law (download here), District Court Judge Mark Kravitz has issued a fascinating and thorough decision, Amara v. CIGNA Corp. et al analyzing one company's change in 1998 from a traditional defined benefit plan to a cash balance plan.  The decision -- despite its length -- is a fairly easy legal read (as easy as reading a legal decision can be, of course) and does a good job at explaining the different theories that have developed in such a conversion. 

I'll quote from the beginning below, but the keys to the case are:

1) The conversion of CIGNA's retirement plan to a cash balance plan did not discriminate against older workers.  As the court stated, "To the contrary, the CIGNA Plan provides greater annual benefits to older workers who are similarly situated to younger workers."  The court wisely observed that any apparent difference in benefits from a worker retiring in 2015 to a worker retiring in 2030 is due to the "time value of money" or interest, not discrimination.

2) CIGNA can, however, be liable for its failure to provide proper notices to the retirees and failure to explain things in an easy to understood manner.  The court seems to suggest that only non-monetary relief may apply in such circumstances, but has left the issue to further briefings.

For Connecticut, the decision ought to become required reading for those interested in ERISA issues such as cash balance plan conversions, anti-backloading and non-forfeiture rules, and plan descriptions and disclosures. 

 I'll leave it to Judge Kravitz's own words to describe the importance of these issues:

Since the mid-1980s, hundreds of U.S. employers have converted their traditional defined benefit pension plans into what are known as "cash balance" retirement plans. In fact, according to the Pension Benefit Guaranty Corporation, over 1,500 cash balance plans and other similar hybrid plans were in existence as of 2003, providing pension benefits to over 8 million participants,approximately one-quarter of the total employee population covered by defined benefit plans.

Like many other corporations, CIGNA Corporationconverted its traditional defined benefit plan to a cash balance plan, in 1998.Despite their popularity among employers, cash balance plans have spawned considerable litigation. This case is yet another in a long list of cases challenging an employer's conversion to a cash balance retirement plan under the Employee Retirement Income Security Act ("ERISA").

Plaintiffs consist of a class of current and former CIGNA employees who participated in CIGNA's traditional defined benefit plan before January 1, 1998 and have participated in CIGNA's cash balance plan since that time. Plaintiffs and Defendants raise numerous class, sub-class, and individual claims and defenses. At the risk of over-simplification, however, the central issues in this case may generally be described as follows:whether CIGNA's cash balance plan is age discriminatory or otherwise violates certain non-forfeiture and anti-backloading rules under ERISA; whether CIGNA gave the notices and other disclosures required by ERISA; and whether the information CIGNA provided its employees about the conversion and the cash balance plan in summary plan descriptions and other materials satisfied ERISA's requirements.

The questions raised in this case are vitally important to both employers and employees (and their families). Given how profoundly significant retirement plans and planning are to the great majority of Americans – employees and employers alike – this is one area where the answers should be clear, explicit, and definite. Regrettably, however, the answers to the issues raised by these parties are not entirely clear, in large measure due to the fact that ERISA, and the regulations under it, are often lamentably obscure – to describe them as a tangled web does not do them justice. On top of that, there are conflicting decisions around the country on identical issues, making planning for nationwide enterprises impossible. ...

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First, a warning.

If your eyes glaze over at discussing the difference between cash balance plans and defined benefit plans, this post is not for you.  However, for those employers who are considering converting their retirement plans or who have done so, a new case released this morning provides some much-needed guidance in Connecticut about the legality of doing so, with a well-reasoned opinion to boot.  It also provides a bit of a primer to people who've heard  "something" about retirement plans, but have been curious about what the big deal was with converting from traditional pension plans to newer reitrement plans.

In Custer v. SNET (download here), federal judge Stefan Underhill has upheld SNET's conversion to a cash benefit plan from 1995.  In doing so, he methodically deconstructs the Plaintiff's arguments (while still acknowledging that this area of law is developing).  His discussion on the background on the case -- for those who need a bit of re-education in the area -- is particularly instructive.

First, he discusses the two types of retirement plans.

ERISA’s statutory structure contemplates two types of retirement plans; defined contribution plans and defined benefit plans. 29 U.S.C. §1002(34) - (35). A defined contribution plan is “a pension plan which provide[s] for an individual account for each participant and for benefits based solely upon the amount contributed to the participant’s account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant’s account.” 29 U.S.C. § 1002(34). By contrast, “a defined benefit plan is any retirement plan that is not a defined contribution plan.” Id. (citing 29 U.S.C. § 1002(35)). A typical defined benefit plan grants retirees a percentage of their final salary for the remainder of their lives.

Cash balance plans generally share certain attributes with both defined contribution plans and defined benefit plans. Like a traditional defined contribution plan, participants in a cash balance plan accrue benefits in an “account.” Unlike a traditional defined contribution plan, however, a participant’s account in a cash balance plan is not “real;” it is a mathematical construct to determine the size of a plan participant’s lifetime annuity that the employer will pay out when the participant retires. The account is not capitalized in the sense that neither the participant, nor the employer, is actually setting aside money. Instead, the employer is simply accruing an obligation to pay out benefits at a future date.

So, what did SNET do? On July 1, 1995, SNET converted its defined benefit plan to a cash balance plan.

Under SNET’s cash balance plan, each participant’s cash balance account is comprised of three parts: the opening account balance; accrued service credits; and accrued interest credits.The opening balance is generally based on the participants’ benefits under the old plan as of July 1, 1995. Participants then earn service credits at the end of each month based upon their level of pay and years of service.

Finally, participants earn interest credits annually based upon fixed negotiated percentages. ... [Central to this argument is that] if a younger participant remains employed through retirement age, he will thus accrue more total interest per service credit than similarly situated older workers. ...

Perhaps as an incentive to take early retirement, as part of the switching to the new plan, SNET front-loaded some retirement benefits. ... As a practical matter, participants thus receive 110 percent of their benefits under the old plan until the value of the cash account under the new plan catches up to and exceeds their permanent enhanced benefit.

The parties, and other courts, refer to the catch-up period as the “wear-away” period because, plaintiffs argue, the benefits that participants can receive but will not increase during that period. The period is more aptly named a “catch-up” period, however, because it is the period during which employees’ benefits under the cash balance plan catch up to their front-loaded permanent enhanced benefit.

The first question for the court was whether the interest credit portion violates ERISA.  The court said no.  It suggests that cash benefit plans, in general are not age-discriminatory "because cash balance plans are functionally equivalent to defined contribution plans, at least with respect to accruing benefits."  The court then uses various support for its conclusion including :

I similarly hold that the interest credit formula of SNET’s cash balance plan is not actually age-discriminatory, and that it merely accounts for the time value of money. As set forth in greater detail below, an employee’s benefits are not calculated based upon whether that employee is older or younger, but are instead calculated based upon whether he is a newer or more senior employee. The critical determinant of an employee’s benefits are his years to retirement, not his age. The fact that age may often have a loose correlation with an employee’s years to retirement does not necessarily make a plan age-discriminatory. In fact, a cash balance plan would more likely violate ERISA § 204(b)(1)(H)(i) if it did not account for the time value of money.

The court also dismisses the employees' argument that the plan "wears away" at their benefits.

Plaintiffs’ allegation that “an older worker has to wait more years after the conversion to the cash balance formula to actually begin earning new retirement benefits,” however, is not accurate. The “wear-away” period is not necessarily longer for older workers; it is longer for workers that have greater frozen benefits. Under the old plan, the size of a worker’s frozen benefits is a function of a worker’s salary and years of service, not his age....

Because a workers’ frozen benefits are not a function of the worker’s age,the size of the “wear-away effect” is not a function of the worker’s age.  For example, the size of the “wear-away” period for an older worker with a given salary and years of service will not be greater than the length as a younger worker’s “wear-away” period with the same salary and years of service to the company.  Indeed, a participant’s age, as opposed to his salary and years of service, has no impact on the length of the “wear-away” period.  

Moreover, employees are not actually “losing” benefits during the “wear-away” period.  SNET chose to calculate the permanent enhanced benefit by starting with an employee’s account balance under the old defined benefit plan, and increasing the balance immediately by ten percent.  If SNET had chosen to evenly distribute the ten percent increase over the period of time during which the value of an employee’s cash balance account caught up to the permanent enhanced benefit, then an employee’s benefits would not remain stagnant, but would constantly increase (even if at a lower rate than the employee was previously receiving under the old plan).  SNET should not be penalized for front-loading the ten percent increase in benefits, as opposed to spreading that ten percent increase out over a period of years.

As you can see from the above, the issues with conversions are technical and, perhaps cumbersome. But for employers who have converted their plans or who are considering doing so, the case provides a roadmap to avoiding some legal pitfalls in the future.

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