For this purpose, the facts at issue in McCutchen are quite simple:
An ERISA plan participant suffered severe injuries in a car accident caused by a third party, and his employer, US Airways, paid nearly $67,000 toward his medical expenses through the company’s group health plan. By its terms, the plan entitled US Airways to reimbursement of amounts paid if the participant later recovered money from the third party. After filing suit, the participant was awarded $110,000 in damages attributable to his injuries – of which the participant retained $66,000 after deducting the lawyers’ 40% contingency fee and expenses. US Airways sought reimbursement of the full amount it had paid.
When the participant refused to reimburse the plan, US Airways filed suit in the U.S. District Court for the Western District of Pennsylvania against both the participant and his attorney seeking to enforce the reimbursement provision of the plan pursuant to ERISA Section 502(a)(3) which, on its face, authorizes civil actions by fiduciaries “to obtain…appropriate equitable relief…or…to enforce…the terms of the plan.”
The district court rejected the participant’s argument that the common fund doctrine should apply to require US Airways to contribute to the costs of recovery and, instead, granted summary judgment to US Airways holding that plan terms required reimbursement from “any monies recovered.” On appeal, the participant argued under a couple of different theories that it would be “inequitable” to reimburse US Airways in full when he had not been fully reimbursed for all his medical expenses. The Third Circuit agreed and reversed the lower court. In its decision, the Third Circuit held “Congress purposefully limited the relief available to fiduciaries under [ERISA] Section 502(a)(3) to appropriate equitable relief.” The appellate court found that it would be inequitable for US Airways to be fully reimbursed when the participant received less than full payment for his medical expenses.
The Supreme Court granted US Airways’ petition for certiorari and ultimately reversed the Third Circuit decision. In doing so, the high Court majority concluded that the participant could not rely on equitable defenses to trump the plan’s clear reimbursement provision. However, since the plan at issue was silent with respect to the allocation of attorneys’ fees, it was appropriate to apply the common fund doctrine The Court reinforced that US Airways could have provided in the plan that the common fund doctrine did not apply to the application of the reimbursement provision, but since it did not, “the common-fund doctrine provides the best indication of the parties’ intent.” The majority’s analysis indicates that the well-established application of the common fund doctrine in equity cases supports the conclusion that the parties must have intended for this default rule to govern “in the absence of a contrary agreement.”
A brief dissent (authored by Justice Scalia and joined by Chief Justice Roberts and Justices Thomas and Alito) disagreed with the majority’s use of the common fund doctrine, finding that this issue was not properly before the court. The dissenting opinion, however, agreed with the portion of the majority’s opinion concluding that equity cannot override unambiguous plan terms.
Suggested Steps for Employers
The holding of this case provides a good reminder that the reimbursement language in health plans should be dusted off and carefully reviewed. Most notably, the issue of whether a participant’s attorneys’ fees will reduce the reimbursement obligation should be specifically addressed, with express language indicating whether the common fund doctrine or any other equity doctrine may be applied to reduce the plan’s reimbursement right. Scrutiny should be placed on the reimbursement provision with other aspects of third party litigation in mind to ensure that the reimbursement the plan expects is what the plan ends up with.
Following its December 22, 2011, ruling we discussed previously that retired Kelsey-Hayes (“Company”) union members must arbitrate their claims for fully-paid lifetime retiree medical benefits, the Eastern District of Michigan handed a victory to different class of union retirees facing similar changes to their healthcare coverages. United Steelworkers of America v. Kelsey-Hayes Co.
Plaintiffs worked at the now closed automobile parts manufacturing plant in Jackson, Michigan. Under the collective bargaining agreements (“CBAs”) with the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union, the Company was required to establish healthcare coverage for retirees and their dependents and surviving spouses and to contribute the full premium for such coverages. Before and after the plant closing in 2006, the Company paid all retirees’ healthcare coverage costs. In September 2011, the Company announced plans to replace the retiree medical plan with individual health reimbursement accounts funded by the Company and to be used by retirees to purchase of individual healthcare policies. On January 1, 2012, the Company discontinued healthcare coverage for retirees age 65 and older and made a one-time contribution of $15,000 for each retiree and spouse for 2012 and provided for an additional $4,800 credit for 2013. Any future contributions would be at the discretion of the Company. Retirees filed suit alleging that the Company’s unilateral modification of their health benefits constituted a breach of the terms of the CBAs in violation of ERISA.
Citing a line of cases addressing the vesting of retiree benefits, including Int’l Union v. Yard Man, 716 F.2d 1476 (6th Cir. 1983), the court held that the CBAs’ promised “continuance” of the healthcare coverages employees had “at the time of retirement” and that such coverages “shall be continued thereafter” for retirees, their spouses and eligible dependents and that any changes could be made “by mutual agreement between the Company and the Union” was unambiguous language demonstrating the plaintiffs’ right to vested lifetime retirement healthcare coverage. In granting summary judgment for in favor of the plaintiffs, the court noted that it had previously held that identical CBA terms unambiguously promise vested, lifetime retiree healthcare benefits. The court further noted that an arbitrator recently considering virtually identical CBA terms found that those Kelsey-Hayes’ retirees had vested rights to medical plan coverages for their lifetime.
Yesterday, the Supreme Court granted a plan participant’s petition for a writ of certiorari in Heimeshoff v. Hartford Life & Acc. Ins. Co., No. 12-729, 2013 WL 1500233 (Apr. 15, 2013). The Court limited its review to a single question raised by the petitioner: “When should a statute of limitations accrue for judicial review of an ERISA disability adverse benefit determination?” The Supreme Court declined review of two other questions raised by the petition regarding the adequacy of notice provided to the participant: (1) “What notice regarding time limits for judicial review of an adverse benefit determination should an ERISA plan or its fiduciary give the claimant with a disability claim?”; and (2) “When an ERISA plan or its fiduciary fails to give proper notice of the time limits for filing a judicial action to review denial of disability benefits, what is the remedy?”
The Second Circuit in Heimeshoff had affirmed the district court’s judgment, holding that Connecticut law permitted the plan to shorten the applicable state limitations period (to a period not less than one year) and that the plan’s three-year limitations period could begin to run before the participant’s claim accrued, as prescribed by plan terms. Heimeshoff v. Hartford Life & Acc. Ins. Co., 496 Fed. Appx. 129, 130 (2d Cir. 2012). In this case, the plan provided that the limitations period ran from the time that proof of loss was due under the plan. Id.
In January, Bryan Cave issued a client alert detailing the Second Circuit opinion in Heimeshoff.
1. Cash payments calculated by reference to benefits provided under an ERISA plan do not “relate to” an ERISA plan for purposes of determining ERISA preemption issues.
2. Attempts to bring executive severance payments and benefits within the scope of ERISA raise a variety of tax and benefits issues that require careful consideration.
Courts have recently seen a flurry of activity from for-profit corporations challenging the Affordable Care Act’s contraceptive mandate, which became effective January 1. These employers claim providing female employees with certain types of FDA-approved contraceptives violates the owners’ right to free exercise of religion.
Do for-profit corporations have a right to free exercise of religion, at least with respect to providing controversial contraceptives to employees? While we’re waiting for that issue to make its way to the Supreme Court, which it most certainly will, federal circuit courts are divided with respect to issuing temporary injunctions until the substantive issues are decided. The Supreme Court weighed in on the Hobby-Lobby case in December 2012, denying its request for an injunction while the company’s general challenge was pending, but it did not address the underlying, controversial issues, such as whether a corporation can even exercise religion in the first place. Circuits courts are left facing a number of injunction requests and the results vary by circuit. The Third, Sixth, and Tenth Circuits have generally denied injunction requests, while the Seventh and Eighth Circuits seem open to issuing temporary injunctions. See Conestoga Wood Specialities Corp. v. Sebelius (3d Cir., February 7, 2013); Autocam Corp. v. Sebelius (6th Cir., December 28, 2012); Grote v. Sebelius (7th Cir., January 1, 2013); Annex Med. v. Sebelius (8th Cir., February 1, 2013); Hobby Lobby Stores, Inc. v. Sebelius (10th Cir., December 20, 2012; aff’d December 26, 2012).
The general standard for granting a temporary injunction in this type of case is whether the plaintiff has a reasonable likelihood of success on its claim, here, the standard being whether the mandate violates an employer’s right to free exercise of religion under the First Amendment or Religious Freedom Restoration Act. Since no circuit court has considered these claims, whether an employer has a reasonable likelihood of success is unclear. One of the key differences between circuits is whether courts accept at face value an employer’s claim that the mandate constitutes a substantial burden on its right to free exercise of religion or whether the court should delve deeper and decide if the employer has a reasonable likelihood of success on the underlying claims. The Autocam court pointed out that the divergence of district courts on this issue establishes the possibility of success. However, since the employer did not demonstrate more than a possibility of success, the court denied the injunction. The Annex Med. court, however, stated that an employer shows a substantial burden on its right to free exercise of religion simply by saying so, and thus granted the injunction.
Topping off the debate, a bill to repeal the portion of the mandate requiring employers to provide emergency contraception was introduced in the U.S. House of Representative on March 5. One of the sponsors argued that Americans were being forced to choose between religious convictions or breaking the law. While the legislation has little chance of being passed, it demonstrates that the contraceptive mandate is still an important issue for many employers and the debate is unlikely to be settled until the Supreme Court addresses the complex, underlying issues.
We thank our Intern, Will Kim, for his help in preparing this post.
Yesterday, the Ninth Circuit issued an opinion in Tibble v. Edison International (Case: 10-56406, 03/21/2013), affirming the Central District of California district court’s ruling in a 401(k) fee case brought under ERISA. The district court had rejected most claims but had entered judgment totaling just over $300,000 for the plaintiff beneficiaries on claims regarding the selection of certain mutual fund investment options, where lower-priced share classes were available in the same funds. Highlights from the decision include:
Statute of Limitations
- The Ninth Circuit rejected a “continuing violation theory” in favor of a bright-line rule that the act of designating an investment for inclusion starts the running of ERISA’s six-year SOL.
- Beneficiaries did not have “actual knowledge” of the alleged deficiencies in the process for selecting retail class mutual funds for the plan’s investment line-up, and, therefore, ERISA’s three year SOL does not apply.
- The panel also held that Section 404(c) (a “so-called” safe harbor that can relieve a plan fiduciary from liability arising from the investment choices made as a direct and necessary consequence of a participant’s exercise of control) did not preclude a merits consideration of plaintiffs’ claims.
- The panel declined to consider defendants’ arguments that class certification was improper since this issue was raised for the first time on appeal.
Revenue Sharing and Standard of Review of Fiduciary Breach Claims
- The Ninth Circuit panel affirmed the district court’s grant of summary judgment to defendants on the claim that revenue sharing between mutual funds and the administrative service provider violated the plan’s governing document and was a conflict of interest. Looking to the Supreme Court’s prior holdings (Firestone Tire & Rubber Co. v. Bruch, Metropolitan Life Insurance Co. v. Glenn and Conkright v. Frommert) on standard of review and agreeing with the holdings of the Third and Sixth Circuits (and rejecting the rulings of the Second Circuit), the Ninth Circuit panel held that, as in cases challenging denials of benefits, a “usual” abuse of discretion standard of review applied to this case which concerns potential violations of fiduciary duties and conflicts-of-interest because the plan granted interpretive authority to the administrator.
Use of Mutual Funds, Short-Term Investment Fund and Unitized Stock Fund
- The Court also ruled that defendants did not violate their duty of prudence under ERISA by including in the plan’s investment menu (i) mutual funds, (ii) a short-term investment fund “akin” to a money market fund, and (iii) a unitized company stock fund.
Finally, the panel affirmed the lower court’s holding, after a bench trial, that the defendants were imprudent in deciding to include retail-class shares of three specific mutual funds in the plan menu because Edison failed to investigate the possibility of institutional-class alternatives.
The Eleventh Circuit Court of Appeals recently issued an opinion that provides guidance on what constitutes an appeal for purposes of exhausting administrative remedies under ERISA § 503. In Florida Health Sciences Center, Inc. v. Total Plastics, Inc. (Nov. 6, 2012), the Court held that a participant’s written protest to the signing of a subrogation agreement did not constitute an administrative appeal of the plan administrator’s claim denial. To read a copy of the Eleventh Circuit’s opinion, click here.
The case involves tragic facts. Kristy Schwade’s infant son started to exhibit symptoms of “shaken baby syndrome” when he was five months old. The cause of the condition was ultimately traced to a daycare provider, who later pled guilty to aggravated child abuse. Doctors determined that the child had incurred catastrophic and permanent brain damage, which required hospitalization and continuous medical treatment. The child later died at age four.
For the first two months after the child’s injury, his medical expenses were paid by the ERISA medical benefits plan sponsored by Schwade’s employer, Total Plastics, Inc. Thereafter, the plan administrator sent Schwade a letter explaining that it could not process her claim for benefits unless she signed and returned a subrogation agreement. The administrator’s request was consistent with the subrogation provision in the SPD, which expressly provided that: (i) “if requested,” a participant must “execute documents . . . and deliver instruments and papers and do whatever else is necessary to protect the Plan’s rights;” and (ii) the administrator “has no obligation” to pay medical benefits if the participant “does not sign or refuses to sign” the documents.
Schwade never responded to the administrator’s request for a signed subrogation agreement. In the months that followed, the plan administrator sent Schwade 54 separate Explanation of Benefit (“EOB”) forms showing non-payment of provider claims. Nearly all of those EOB forms explained that the claims were not payable because the plan “needed updated accident information to process [the] claim.” The EOBs provided a phone number and a website Schwade could use to contact the plan administrator, but she never responded to any of the EOBs.
Seven months later, Schwade’s lawyer sent a protesting the plan administrator’s position and complaining that the language of the subrogation agreement was “totally unacceptable.” The lawyer then tried to cut a deal with the plan. In follow-up correspondence, he proposed that that Schwade and the plan split any recovery from a civil action equally (after payment of attorneys’ fees and costs). The plan ignored the lawyer’s proposal.
Tampa General Hospital ultimately sued Schwade for more than $600,000 in unpaid medical expenses. Schwade filed a third-party complaint against Total Plastics, challenging the plan’s denial of benefits. The trial court granted summary judgment to Total Plastics on the grounds that the lawyer’s correspondence did not constitute an administrative appeal, and that Schwade therefore did not exhaust her administrative remedies under the plan.
On appeal, the Eleventh Circuit affirmed the trial court’s grant of summary judgment. It rejected Schwade’s argument that the attorney letters constituted an “appeal,” and it noted that even if the letters could be construed as an appeal, they were sent after the expiration of the plan’s 180-day administrative appeal period.
The late submission of the protest letters from Schwade’s lawyer clouds the real holding in this case. The import of Florida Health Sciences Center is that mere written protests to the signing of a subrogation agreement do not constitute an administrative appeal for exhaustion purposes. In order to exhaust administrative remedies, and thereby preserve a claim for litigation, the claimant should make it clear that he or she is appealing the prior denial of benefits and at least attempt to address the merits of the claim denial. Protestations as to the fairness of an express subrogation requirement will not carry the day.
On September 13, 2012, the Sixth Circuit in Reese v. CNH Am. LLC, 11-1359, 2012 WL 4009695 (6th Cir. Sept. 13, 2012) reiterated its 2009 ruling in the same case that an employer could unilaterally modify a retiree health plan, as long as the modifications were reasonable. The September 13th ruling was the Court’s second review of the case on appeal; the sequel to an unfolding drama.
In this case, the employer and labor union entered a collective bargaining agreement which stated the employer would provide healthcare benefits for retirees and their eligible surviving spouses. The issue was whether the lifetime healthcare benefits had vested and, if so, whether, and to what extent, the employer could modify the benefits. In 2009, the Court found that the lifetime health care benefits had vested pursuant to the collective bargaining agreement, but that the employer could modify the benefits as long as the modifications were reasonable. The Court reasoned that the collective bargaining agreement provisions on retiree health benefits had not been perceived as unalterable by the parties, since they had been altered on various occasions, such as to implement a managed health care plan and to take into account the enactment of Medicare Part D.
In 2009, the Court sent the case back to the lower court to determine if the modifications of the retiree health benefits were reasonable. The lower court incorrectly assumed that the modification had to be agreed to as part of the collective bargaining process. Comparing the district court’s ruling to a disappointing film sequel, the Court reversed and remanded the case to the district court a second time, since the district court had misread its original opinion and had not resolved the reasonableness question as instructed.
The Court listed three considerations for the district court to examine in making its reasonableness determination: (1) Does the modified plan provide benefits “reasonably commensurate” with the old plan? (2) Are the proposed changes “reasonable in light of changes in health care?” and (3) Are the benefits “roughly consistent with the kinds of benefits provided to current employees?”
This case will be an interesting one to follow going forward. As plan sponsors are aware, other cases have taken much more of an “all or nothing” approach to the vesting of retiree benefits or required the consent of the union to modify the benefits. However, it is not clear how the lower court will resolve the reasonableness question or whether we’ll find ourselves tuning in for yet another disappointing sequel to this unfolding saga.
We thank our extern, Uche Enemchukwu, for her help in preparing this post.
On Monday, the Eleventh Circuit Court of Appeals ruled in Seff v. Broward County that Broward County, Florida’s wellness program qualified for the Americans with Disabilities Act (ADA) bona fide benefit plan safe harbor and therefore was not discriminatory under the ADA. This is a helpful ruling for employers maintaining or looking to implement wellness programs.
Background. The ADA generally provides that an employer can only require medical examinations of its employees if they are job-related and consistent with business necessity. However, the ADA also says that it is not intended to prohibit an employer “from establishing, sponsoring, observing or administering the terms of a bona fide benefit plan that are based on underwriting risks, classifying risks, or administering such risks that are based on or not inconsistent with State law.”
The Case. In the case, Broward had a wellness program with biometric screening and an online health risk assessment. Employees who were determined to have asthma, hypertension, diabetes, congestive heart failure, or kidney disease were offered the opportunity to participate in a disease management program, which gave them the chance to receive waivers of co-payments for some medications. If an employee chose not to participate in the wellness program at all, he or she was charged $20 on each bi-weekly paycheck.
The issue in the case was whether the wellness program was part of the Broward County’s health plan, within the meaning of the ADA safe harbor. If it did not meet the safe harbor, it could have been ruled to violate the ADA (if another exception did not apply). Broward’s acting benefits manager had testified that the wellness program was not part of the plan. However, the court said it did not read the ADA safe harbor as requiring the wellness program to be part of the same physical document as the plan. The court instead pointed out that the health insurer offered the program as part of its contract to provide insurance, the program was only available to plan enrollees, and that Broward presented the program in at least two employee handouts. These were sufficient for the wellness program to qualify for the safe harbor in the court’s view.
Our Thoughts. This is good news for employers. The ADA’s treatment of wellness programs has been somewhat of a gray area, and this helps provide some clarity. However, employers should not read too much into the case. For example, the case does not speak to a wellness program that is available to employees regardless of their participation in the health plan. It is not clear such a program would qualify for the safe harbor, although it may be permissible under other ADA provisions.
Additionally, while the court does not require that the wellness program be part of the plan document for ADA purposes, wellness programs that provide medical care (like disease management programs) are ERISA welfare plans. As a result, they should either have their own plan document or be part of the health plan’s document. Finally, any wellness program needs to comply with HIPAA’s nondiscrimination requirements.
In a decision released July 24, 2012, the Eight Circuit affirmed a lower court judgment that a plan administrator committed no abuse of discretion when it terminated an employee’s long-term disability benefits. The case, styled Wade v. Aetna Life Ins. Co., No. 11-3295 (8th Cir. July 24, 2012), involved a Quest Diagnostics, Inc. employee’s challenge to Aetna’s termination of her benefits despite a previous, contrary decision from the Social Security Administration (SSA), coupled with allegations of “serious procedural irregularities.”
In its decision, the 8th Circuit began by concluding that the district court had reviewed the termination decision under the correct “abuse-of-discretion” standard. Under ERISA, a court’s review of a plan administrator’s denial of benefits considers whether the benefit plan gives the administrator the discretion to determine eligibility for benefits. Here, the plan unequivocally granted Aetna this discretionary authority. Nevertheless, Wade sought de novo review of Aetna’s termination decision by alleging that Aetna had committed “serious procedural irregularities,” which included Aetna’s failure to provide the plaintiff’s attorney with the operative plan documents for more than two years. Under plaintiff’s desired de novo review, the district court would independently examine the termination of benefits without any deference to Aetna’s previous decision.
Citing the district court’s opinion below, the 8th Circuit observed that the irregularities all took place after the decision to terminate the plaintiff’s long-term disability benefits, as well as the appeal of that decision. The plaintiff had failed to offer any explanation how these irregularities could have affected the termination decision itself (or the appeal). As a result, the Eighth Circuit concluded that any irregularities lacked a “connection to the substantive decisions reached.” Without this connection, the allegations failed to trigger the “sliding-scale” standard of review (see below), and Aetna’s conclusion would be reviewed for only an abuse of discretion.
Next, the 8th Circuit found that Aetna had not abused its discretion by ignoring the SSA’s award of long-term disability benefits to Wade. First, the court noted that plan administrators are not generally bound by the SSA’s disability determinations. Moreover, Aetna’s termination occurred five years after the SSA’s evaluation, with new information that the SSA never considered. Because the court was uncertain that the SSA would have made the same determination upon these facts, they concluded that substantial evidence supported Aetna’s decision to terminate the plaintiff’s benefits. Accordingly, the 8th Circuit affirmed the district court’s judgment.
While the holding itself hardly stretches the imagination, in a footnote the panel interestingly suggested that the Eighth Circuit’s “sliding-scale” approach toward standards of review might be in peril following the U.S. Supreme Court decision in Metropolitan Life Ins. Co. v. Glenn, 554 U.S. 105 (2008).
Over a decade ago, the Eighth Circuit adopted a sliding scale for both conflicts of interest and procedural irregularities in Woo v. Deluxe Corp., 144 F.3d 1157 (8th Cir. 1998). (A conflict of interest is said to exist where, as here, an employer or insurance company serves the dual role of administering a plan and making eligibility decisions under that plan.) In the Eighth Circuit, courts would apply a less deferential standard of review to the plan administrator’s decision than abuse of discretion when confronted with a conflict of interest or procedural irregularity. Thus, a “sliding scale” arose, with a spectrum of standards of review available between the highly-deferential abuse of discretion standard and non-deferential de novo review.
In Glenn, however, the U.S. Supreme Court clarified the manner in which conflicts of interest affect a district court’s review of the plan administrator’s eligibility decisions. The Supreme Court concluded that a conflict of interest should be considered a factor in a court’s abuse-of-discretion analysis. In other words, no unique “sliding scale” exists for conflicts of interest, because courts could weigh these conflicts along with any other considerations for an abuse of discretion. As such, Glenn partially overruled Woo. Glenn did not, however, consider how procedural regularities might affect the appropriate standard of review. In its wake, the Eighth Circuit has largely continued to apply its sliding-scale approach in procedural irregularity cases.
While Wade’s actual holdings are certainly instructive—that (1) after-the-fact procedural irregularities will not affect judicial review of a plan administrator’s denial, and that (2) the SSA is not the final word on disability determinations, especially in light of new evidence—the largest implication for administrators may be the possibility of challenges to the Eighth Circuit’s sliding-scale approach for procedural irregularities. Plan administrators benefit from courts reviewing their decisions as deferentially as possible, and the elimination of the sliding-scale approach could potentially obligate courts to consider termination decisions for only an abuse of discretion.
At this point, three obvious solutions are available. First, if Glenn offers any insight on the issue, a procedural irregularity might simply be another factor for courts to consider in determining whether an abuse of discretion existed. At least one Eighth Circuit panel arguably applied this approach in Chronister v. Unum Life Ins. Co. of Am., 563 F.3d 773 (8th Cir. 2009). Nevertheless, the Eighth Circuit has not formally adopted this standard.
Alternatively, the Eighth Circuit could conceivably swing the other direction completely and find that procedural irregularities might trigger de novo review of termination decisions by district courts. This would result in independent review by courts, which would be highly prejudicial to plan administrators.
Finally, the Eighth Circuit could continue on its current path and find that procedural irregularities occupy their own independent sphere within plaintiffs’ challenges to administrator decisions and affirm the sliding-scale approach. In that case, only the Supreme Court would be available to modify the standard.
In short, questions continue to surround the proper standard of review for courts facing allegations of procedural irregularities in the administration of benefit plans. With the proper standard up in the air, plan administrators should be mindful of the relative benefits and challenges they face under any potential standard of review. When the dust settles, however, plan administrators may stand to benefit from a far less compromising standard of review than currently used within the Eighth Circuit.