ERISA Lawyer Blog

Employment-New York Court Of Appeals Holds That A Compliance Officer Of A Hedge Fund Is An At-Will Employee Who May Be Dismissed At Any Time

Fri, 18 May 2012 11:24:17 -0500

In Sullivan v. Harnisch, 2012 NY Slip Op 03574 (NY Court of Appeals May 8, 2012), the Court stated that New York common law does not recognize a cause of action for the wrongful discharge of an at-will employee. In this case, it would not make an exception to that rule for the compliance officer of a hedge fund.

The plaintiff, Joseph Sullivan ("Sullivan"), was a 15% partner in two affiliated firms, defendants Peconic Partners LLC and Peconic Asset Managers LLC (collectively called "Peconic", and colloquially referred to as a hedge fund). He was also Peconic's Executive Vice President, Treasurer, Secretary, Chief Operating Officer and Chief Compliance Officer. Defendant William Harnisch ("Harnisch") was the majority owner, Chief Executive Officer and President of Peconic.

Sullivan was fired from Peconic after a dispute with Harnisch . The dispute started when Sullivan complained about certain improper trades by Harnisch, which consisted of sales of stock by Harnisch for his personal account and the accounts of members of his family, and which allowed Harnisch to take advantage of opportunities from which the hedge fund clients were excluded. This suit ensued, with Sullivan claiming wrongful discharge.

In analyzing the case, the Court said that, absent a violation of a constitutional requirement, statute or contract, in New York, an employer's right at any time to terminate an employment at will remains unimpaired. Sullivan's claim for wrongful discharge is barred, unless something in this case justifies an exception to the foregoing rule. The courts do recognize one exception: wrongful discharge will result when an attorney is discharged from employment at a law firm because he complained of professional misconduct. However, this exception is based on the unique circumstances of the legal profession, in that compliance with ethics is the center of the relationship of the attorney to the law firm. A compliance officer of a hedge fund is not in the same position as an attorney. Thus, no exception to the at-will rule applies to Sullivan, and his claim for wrongful discharge fails.

ERISA-Eleventh Circuit Adopts The Moench Presumption, And Uses It To Reject The Plaintiffs' Claim That The Fiduciaries' Failure To Divest Employer Stock Was Imprudent

Thu, 17 May 2012 10:04:35 -0500

In Lanfear v. Home Depot, Inc., No. 10-13002 (11th Cir. 2012), the plaintiffs had been participating in a retirement plan (the "Plan") which contained an "eligible individual account plan" (an "EIAP").The Plan was maintained by their employer, the Home Depot, Inc. ("Home Depot"). Participants were allowed to direct the investment of their accounts under the EIAP into a "Company Stock Fund", which held shares of Home Depot stock. One of the plaintiffs' claims was that the fiduciaries of the Plan, who are the defendants in this case, breached their fiduciary responsibilities under ERISA because they continued to purchase and failed to sell Home Depot stock held in the Company Stock Fund, even though they knew based on nonpublic information that the stock price probably was inflated (the "Prudence Claim"). The nonpublic information pertained to illegal chargebacks of merchandise to vendors and backdating of stock options by Home Depot.

As to the plaintiff's Prudence Claim, the Court noted that the issue is whether the plaintiff's allegations were sufficient to rebut the Moench Presumption, under which an ERISA fiduciary's decision to increase and retain a plan's investment in employer stock-when the fiduciary is not absolutely required to keep the plan invested in employer stock- is entitled to a presumption of prudence. In applying the Moench Presumtion, the Court: (1) adopted the Moench Presumption for the Eleventh Circuit; (2) held that the Moench Presumption is overcome when a fiduciary acts in compliance with the terms of the plan and the fiduciary could not have reasonably believed that the persons creating the plan (the "settlors") would have intended for him to so act under the circumstances; and (3) held that the Moench Presumption may be applied at the motion to dismiss stage of litigation.

The Court then reviewed the plaintiffs' complaint in view of the Moench Presumption. It said that the plaintiffs base their allegation that Home Depot stock was an imprudent investment on the change in its market price after the company released the earnings report reflecting the effect of the chargebacks. On February 18, 2005, the day before it released the report, Home Depot stock traded at $42.02 per share. By April 28, 2005, it had fallen by about 16.5% to $35.09. By July 22, 2005, however, the price had risen to $43.47, an increase of nearly 3.5% over the price of the stock before the report had been released. The Court termed these price changes as "mere stock fluctuations", which are not sufficient to overcome the Moench Presumption. As such, the Court ruled that the plaintiffs' Prudence Claim fails.

ERISA-Second Circuit Applies Moench Presumption To Deny Claim That Plan Fiduciaries Imprudently Allowed Participants To Purchase And Hold Employer Stock In Their Accounts

Wed, 16 May 2012 10:36:56 -0500

In Fisher v. JP Morgan Chase & Co., No. 10-1303-cv (2nd Cir. 2012) (Summary Order), the plaintiffs were appealing an order from the district court granting defendants' motion for judgment on the pleadings. The plaintiffs were participants in a 401(k) plan (the "Plan"), which was maintained by their employer, JP Morgan Chase & Co. ("JP Morgan"), and whose individual accounts in the Plan held shares of JP Morgan common stock between April 1, 1999 and January 2, 2003 (the "Class Period"). The plaintiffs' complaint asserts, among other things, the following two claims: (1) that the defendants negligently permitted Plan participants to purchase and hold shares of JP Morgan common stock when it was imprudent to do so (the "Prudence Claim") and (2) that the defendants failed to disclose and negligently misrepresented material facts to Plan participants (the "Communications Claim").

The Second Circuit Court of Appeals (the "Court") noted that, in October 2011 (in In re Citigroup ERISA Litig., 662 F. 3d 128 (2nd Cir. 2011) and Gearren v. McGraw-Hill Cos., 660 F. 3d 605 (2nd Cir. 2011)), it had adopted the "Moench Presumption" for the Second Circuit. This presumption requires that courts apply a presumption of prudence when reviewing ERISA fiduciaries' decisions to not divest a plan of employer stock, or to not impose restrictions on participants' investment in employer stock. The Court also held that ERISA fiduciaries have no duty to provide Plan participants with non-public information that could pertain to the expected performance of Plan investment options.

The Court said that, in accordance with the Moench Presumption, since the investment in JP Morgan stock was in accordance with the Plan's terms, the Court will review the plaintiffs' Prudence Claim for an abuse of discretion. It further said that ERISA fiduciaries are required to divest an individual account plan-such as the Plan-of employer stock only when they know or should know that the employer is in a dire situation. Mere stock fluctuations, even those that trend downward significantly, are insufficient to establish the requisite imprudence to rebut the presumption. Here, the plaintiffs have not sufficiently alleged that the defendants knew or should have known that JP Morgan was in a dire situation. JP Morgan's stock price fell approximately 55% over the course of the Class Period. However, even when the stock was at its lowest price -- $15 per share -- it still retained significant value and by the end of the Class Period, the stock had rebounded to $25 per share. Moreover, throughout the Class Period, JP Morgan remained a viable company. As such, the Court concluded that the plaintiffs' Prudence Claim fails.

As to the plaintiffs' Communications Claim, the Court said that, per its October 2011 decisions, ERISA fiduciaries have no duty to provide Plan participants with non-public information that could pertain to the expected performance of Plan investment options. Further, the only false or misleading statements identified by the plaintiffs are in SEC filings that the plaintiffs contend were incorporated into the Plan's summary plan description. ERISA, however, holds fiduciaries liable solely to the extent that they were acting as a fiduciary when taking the action complained of. In this case, the defendants were acting in a corporate, not a fiduciary, capacity when making these statements, and thus those statements cannot give rise to a breach of duty under ERISA. As such, the Court concluded that the plaintiffs' Communications Claim fails.

Based on the above, the Court affirmed the district court's decision.

ERISA-Fourth Circuit Finds That An Amendment Eliminating An Early Retirement Supplement Violated ERISA's Anti-Cutback Rule

Mon, 14 May 2012 08:48:55 -0500

In Savini v. Washington Safety Management Solutions, LLC, No. 11-1206 (4th Cir. 2012) (Unpublished Opinion), the plaintiff, Noorali Savini ("Savini"), brought suit under ERISA, claiming that the termination of an early retirement pension supplement by defendant, Washington Safety Management Solutions, LLC ("WSMS"), violated ERISA's anti-cutback provisions. The district court granted summary judgment to WSMS, and Savini appeals.

The retirement plan offered by WSMS (the "Plan") had stated that "Accrued Benefit" means the normal retirement Pension computed under Section 4.01(b), less the WSRC Plan offset as described in Section 4.13, plus any applicable supplements as described in Section 4.12. On December 28, 2004, the Plan's benefits committee amended the Plan to eliminate Section 4.12(a), which granted a $700 monthly benefit to Plan members electing to take early retirement on or after January 1, 2005. This amendment was not communicated to participants for nearly 7 months. Savini retired from WSMS on or about April 30, 2005, believing that he would be entitled to the $700 per month supplement. On June 8, 2006, Savini received a letter from WSMS stating that he had incorrectly received the $700 monthly benefit for thirteen months and requesting reimbursement of $9,100. Eventually, this suit ensued.

In analyzing the case, the Fourth Circuit Court of Appeals (the "Court") said that Savini alleges that the committee's deletion of Section 4.12(a) from the Plan violated ERISA's anti-cutback requirements, so that the amended Plan's elimination of the $700 early retirement benefit should not be enforceable against him. The issue here is whether the $700 benefit was included in the "accrued benefit" as defined by ERISA and the Plan. ERISA's anti-cutback rule provides that the accrued benefit of a participant under a plan may not be decreased by an amendment of the plan (29 U.S.C. § 1054(g)(1)). To determine whether WSMS violated this provision, a court must determine what benefits may be accrued. ERISA defines "accrued benefit" as the employee's accrued benefit determined under the plan and expressed in the form of an annual benefit commencing at normal retirement age (26 U.S.C. § 411(a)(7)(A)(i)). This definition requires a court to look at the terms of the plan at issue.

The Plan's definition of "Accrued Benefit"-which defines the plan's accrued benefit within ERISA's meaning- includes any Section 4.12 supplements, including the $700 supplement in question, notwithstanding the word "applicable". That is, the plain, unambiguous language of the Plan contemplates inclusion of the Section 4.12(a) supplements in its definition of "Accrued Benefit." As such, the supplement is protected under ERISA's anti-cutback rule, and may not be amended away. Accordingly, the Court reversed the district court's ruling, and remanded the case back to district court for further proceedings consistent with its decision.

ERISA-Second Circuit Holds That Bona Fide Sale Exemption To Withdrawal Liability Did Not Apply When Purchaser Was Not Obligated To Maintain Substantially The Same Number Of Contribution Base Units As The Seller

Thu, 10 May 2012 13:12:35 -0500

HOP Energy, L.L.C. v. Local 553 Pension Fund, No. 10-3889-cv (2nd Cir. 2012), involved a determination of whether the "bona fide sale exemption" (found in 29 U.S.C. § 1384(a)(1)) prevented the imposition of withdrawal liability under ERISA.

In this case, the plaintiff, HOP Energy, L.L.C. ("HOP"), was in the business of delivering fuel oil and providing heating services. Prior to May 12, 2007, it serviced New York City customers through its Madison Oil operating division ("Madison") . Madison was a "union shop" and had signed the Teamsters Local 553 2004-07 Master Collective Bargaining Agreement (the "2004-07 Master CBA"). On May 12, 2007, HOP sold 100% of Madison's operating assets to Approved Oil Company ("Approved"), also a signatory to the 2004-07 Master CBA. Teamsters Local 553 has a multi-employer pension fund (the "Fund"). The 2004-07 Master CBA required employers to contribute to the Fund, based on a certain number of contribution base units determined by the number of hours their employees worked.

To effectuate Madison's sale, HOP and Approved entered into an Asset Purchase Agreement ("APA"), which provided that:

Approved shall make contributions to the Fund for substantially the same number of contribution base units for which HOP had an obligation to contribute with respect to the operations covered by the Fund. Notwithstanding the previous sentence ..., nothing in this Section shall impair or limit the Purchaser's right to discharge, lay off, or hire employees or otherwise to manage the operations of the Business, including the right to amend, revise or terminate any collective bargaining agreement currently in effect and, as a consequence, reduce to any extent the number of contribution base units with respect to which Approved has an obligation to contribute to any plan.

Following the sale of Madison's assets, HOP ceased operations in New York City and also ceased contributing to the Fund. The Fund's sponsor assessed HOP withdrawal liability for $1,204,007. HOP asked the Fund to reconsider the assessment, claiming that the Madison sale was exempt from withdrawal liability because it constituted a bona fide asset sale. The
Fund upheld its assessment, and the case found its way to the Second Circuit Court of Appeals (the Court). The issue for the Court: did Approve have a post-sale obligation to contribute substantially the same number of contribution base units to the Fund as HOP (as required by 29 U.S.C. § 1384(a)(1)(A))? If so, the exemption from withdrawal liability would apply, since all other conditions for the exemption had been met.

The Court said that, since under the terms of the APA Approved could reduce the number of employees or take other steps that would result in a decrease in its contribution base units and thus the amount of its contributions to the Fund, Approved had no obligation to maintain substantially the same number of contribution base units that HOP was responsible for. Nothing in the 2004-07 Master CBA, any other agreement or any law placed any such obligation on Approved. Therefore, the Court ruled that the bona fide sale exemption was not available to block the imposition of the withdrawal liability on HOP.

ERISA-Fifth Circuit Rules That Plaintiff Is Not Entitled To LTD Benefits For A Neck Injury

Wed, 09 May 2012 11:19:42 -0500

In Jurasin v. GHS Property & Casualty Insurance Company, No. 11-50500 (5th Cir. 2012) (Unpublished Opinion), the plaintiff, John Jurasin ("Jurasin"), was seeking long-term disability ("LTD") benefits for a neck condition he claims resulted from an accident during work. His employer provides an Occupational Injury Benefit plan (the "Plan"), which is subject to ERISA, and which provides LTD benefits. The Plan is administered by Caprock Claims Management ("Caprock") and funded with an insurance policy issued by GHS Property & Casualty ("GHS"). Caprock informed Jurasin that his neck condition was not compensable under the Plan, since the work accident did not cause or excacerbate the neck injury. A review board also denied his claim. Jurasin brought suit, as a claim for benefits under ERISA (specifically under 29 U.S.C. § 1132(a)(1)(B)). However, the district court granted summary judgment to the defendants.

In analyzing the case, the Court said that when, as here, the administrator of an ERISA plan has discretion to determine eligibility and interpret plan terms, the administrator's denial of a claim for benefits is reviewed for an abuse of discretion. The Court noted that it did not find any conflict of interest between the plan administrator, Caprock, and the Plan's benefit payor, GHS, that could result in an abuse of discretion.

Jurasin had asserted that the district court erred by striking out supportive portions of his and his doctor's affidavits. However, the Court responded by stating that evidence is irrelevant to the validity of the decision regarding plan coverage unless it is in the administrative record, relates to how the administrator has interpreted the plan in the past, or would assist the court in understanding medical terms and procedures. The Court found that the district court followed this rule carefully when striking those portions of the affidavits and admitting others. Further, the admitted evidence has indications that the neck injury was unrelated to the accident at work, and thus is not compensable by the Plan. There was admitted evidence to the contrary, but the plan administrator did not have to accept it in the face of other medical evidence. As such, the Court found that Caprock did not abuse its discretion in determining that Jurasin's neck injury was not compensable by the Plan. Therefore, the Court affirmed the district court's ruling.

ERISA-Second Circuit Rules That Claim For Death Benefit Cannot Be Denied Under the Plan's Exclusion For Intentionally Inflicted Injuries

Tue, 08 May 2012 10:01:20 -0500

In Martin v. Hartford Life and Accident Life Insurance Company, No. 11-1310-cv (2nd Cir. 2012) (Summary Order), the plaintiff, Amanda Martin ("Martin"), was appealing a ruling from the district court granting summary judgment to the defendant, Hartford Life and Accident Life Insurance Company ("Hartford"), on her claim for death benefits. The death benefits were payable with respect to Martin's decedent husband, under an employee welfare benefits plan subject to ERISA (the Plan"). Hartford was the plan administrator and insurer of the Plan. It denied the claim in that capacity, after an administrative review, relying on the Plan's exclusion for intentionally self-inflicted injury.

In analyzing the case, the Second Circuit Court of Appeals (the "Court") noted that the Plan grants Hartford full discretion and authority to determine eligibility for benefits and to construe and interpret all terms and provisions. Therefore, the Court's review of Hartford's claim denial is limited to abuse of discretion. But since Hartford both evaluates claims for benefits and pays benefits claims, Hartford has a conflict of interest which must be weighed as a factor in determining whether there is an abuse of discretion.

In this case, Martin's husband had negligently electrocuted himself to death, during some autoerotic activity. The Court said that Hartford's interpretation of the Plan, which would deny Martin's claim due to an intentionally self-inflicted injury, would exclude injuries resulting from merely negligent acts, even if the insured did not intend to inflict injury upon himself. Interpreting an exclusion for intentionally self-inflicted injury to exclude negligently self-inflicted injury is an abuse of discretion. To the extent that Hartford now attempts to offer a different rationale for its denial of Martin's claim after the completion of the claim's administrative review, Hartford failed to provide Martin with the adequate notice setting forth the specific reasons for such denial and the full and fair review to which she is entitled under ERISA. As such, the Court vacated the district court's decision, and remanded the case back to the district court, with instructions to return the case to Hartford for reconsideration in light of this decision.

ERISA-Fourth Circuit Holds That Plaintiff Did Not Timely File Suit For LTD Benefits

Mon, 07 May 2012 10:17:57 -0500

In Belrose v. The Hartford Life & Accident Insurance Company, No. 10-2405 (4th Cir. 2012) (Unpublished), the plaintiff, Benjamin Belrose ("Belrose"), was appealing the district court's order granting the motion by the defendant, Hartford Life & Accident Insurance Company ("Hartford"), to dismiss Belrose's action challenging the termination of his long-term disability ("LTD") benefits.

In this case, Belrose became a full-time employee of the Camber Corporation ("Camber") on August 1, 2002, and became eligible for disability benefits under the Camber Group Benefit Plan (the "Plan"). Hartford both administered claims for and insured the Plan. On September 10, 2002, In December 2002, due to various heart conditions, Belrose applied for and began receiving LTD benefits under the Plan. The benefits continued until October 5, 2005, when Hartford terminated the benefits. Belrose appealed the termination. The decision to terminate Belrose's LTD benefits was affirmed on administrative appeal, and Hartford issued a final denial letter to Belrose on June 14, 2006. He filed this suit on July 9, 2010 . The question for the Fourth Circuit Court of Appeals (the "Court"): was the district court correct in dismissing Belrose's case?

The issue in the case was whether Belrose filed the suit before the statute of limitations expired. In analyzing this issue, the Court explained that ERISA does not specify a statute of limitations for a plan participant suing for benefits. ERISA allows a plan to set its own limitations period. However, if the plan does not do so, the courts may impose the applicable state statute of limitations. Further, an ERISA claim, and therefore the statute, does not accrue or begin to run until a claim of benefits has been made and formally denied.

Here, the Plan contained a three-year limitations period, which the Plan stated commenced on the date Hartford required the beneficiary to furnish proof of loss. However, in granting Hartford's motion to dismiss, the district court reasoned that because the limitations period for an ERISA claim does not begin to run until the insurer issues a formal denial--despite the terms of claims accrual which may be contained within the Plan--Hartford's three-year limitations period was not unreasonable or contrary to public policy. The Court agreed with this reasoning. Therefore, the statute of limitations began to run on June 14, 2006, the date on which the final denial letter was issued. Belrose had until June 14, 2009 to file this suit. He did not meet the deadline, since he did not file until July 9, 2010 . Accordingly, the Court affirmed the district court's ruling.

Employee Benefits-IRS Provides Help For Employers Who Missed The April 30 Deadline For Adopting Compliant Pre-Approved Document For Their Defined Benefit Plans

Fri, 04 May 2012 09:51:24 -0500

The Internal Revenue Service (the "IRS") has provided help on it's website for any employer who missed the April 30, 2012 deadline for adopting a compliant pre-approved document for its defined benefit plan. By way of background, the IRS says that, if an employer uses a pre-approved plan document for its defined benefit pension plan (purchased from a bank, insurance company or a similar provider), the employer should have adopted an updated version of its plan by April 30, 2012 (adoption requires a signing and generally any action required by the employer to approve the signing, such as a board resolution).

The plan's provider should have sent the employer an amended plan document, approved by the IRS complying with changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), for the employer to adopt. Even if the employer signed an EGTRRA amendment (sometimes referred to as "EGTRRA good-faith amendments") to its plan, the employer is still required to adopt an EGTRRA plan document. The failure to adopt by the April 30 deadline means that the employer's plan no longer complies with the tax law and certain tax benefits are no longer available.

So what happens if the employer missed the April 30 deadline? The IRS says that you should correct the failure by filing an application with the IRS's Voluntary Correction Program (the "VCP"). The IRS website provides the details on this application.

ERISA-Third Circuit Rules That A Former Trustee Is Liable For Over $4 million For Breach Of Fiduciary Duty

Thu, 03 May 2012 09:56:17 -0500

In Chaaban v. Criscito, No. 11-2096 (3rd Cir. 2012) (Non Precedential Opinion), the plaintiffs, the current Trustees (the "Trustees") of the Diagnostics & Clinical Cardiology, P.A. Profit Sharing Plan (the "Plan"), filed suit alleging that the defendant, Dr. Mario Criscito ("Criscito"), the trustee of the Plan until 2007, violated the fiduciary duties he owed to the Plan participants under ERISA. The district court granted the Trustees' motion for summary judgment and awarded them $4,117,464.65. Criscito appealed.

The suit relates to a sale of stock by Criscito in January of 2000, when he was the Plan's trustee. At that time, the Plan had two accounts holding plan assets. One account was the "Morgan Stanley Account", a single account with commingled assets, in which each Plan participant had a share. Criscito sold all of the stock in the Morgan Stanley Account near the peak of the "tech bubble" in January of 2000. The assets in this Account were worth $12,952,936.42 at the end of 1999, but Criscito reported to the third-party administrator, American Pension Corporation ("APC"), that the balance of the account was $4,017,942.57. This report greatly understated the value of each participant's portion of the Morgan Stanley Account. Later, the Morgan Stanley Account was divided up, and each participant's interest therein was transferred to an individual account for that participant. Due to Criscito's report, each participant received smaller transfers into their individual accounts than would have otherwise been the case.

Criscito proceeded to use the balance of the Morgan Stanley Account-that is, the approximately $8.9 million in amounts not transferred to the individual accounts- for personal transactions, including making distributions from the Plan to himself. Criscito succeeded in concealing his actions. His activities were not discovered until he was removed as the Plan's trustee in 2007.

In analyzing the case, the Third Circuit Court of Appeals (the "Court") ruled that the suit was timely filed. Since the case involves fraud or concealment- Criscito hid his nefarious actions until discovery in 2007-ERISA's six year statute of limitations applies (the statute is found in 29 U.S.C. § 1113), and the statute begins to run only when the fraud or concealment is discovered. The suit was filed well within 6 years of the discovery. Next, the Court reviewed the Trustees' claim for damages against Criscito under ERISA (brought under 29 U.S.C. § 1132(a)(2) and 29 U.S.C. § 1109(a)). The Court said that it is clear that, as the Plan's trustee, Criscito breached his ERISA-imposed duty and caused a loss to the Plan. He fraudulently reported an inaccurate account balance to APC, improperly distributed the Plan's assets to himself, and otherwise used the assets for his personal benefit. These fraudulent actions resulted in a loss when the Plan participants received an amount smaller than their proportionate shares in the Morgan Stanley Account. Thus, the Court found that the Trustees are entitled to their summary judgment. The Court also ruled that the district court's determination of the amount of the damages was correct. As such, the Court affirmed the district court's ruling.

Employment-More On The EEOC's Revised Enforcement Guidance On The Consideration of Arrest and Conviction Records in Employment Decisions

Wed, 02 May 2012 11:25:00 -0500

As discussed in my earlier blog (of April 26), the Equal Employment Opportunity Commission (the "EEOC") has issued a revised Enforcement Guidance on the Consideration of Arrest and Conviction Records in Employment Decisions Under Title VII of the Civil Rights Act of 1964 (the "Enforcement Guidance") and a set of Questions & Answers (the "Q & As") to discuss the Enforcement Guidance. At a minimum, the following should be taken from these documents.

How is Title VII Relevant To The Use Of Criminal History Information? There are two ways in which an employer's use of criminal history information may violate Title VII. First, Title VII prohibits employers from treating job applicants with the same criminal records differently because of their race, color, religion, sex, or national origin ("disparate treatment discrimination"). Second, even where employers apply criminal record exclusions from employment uniformly, the exclusions may still operate to disproportionately and unjustifiably eliminate people of a particular race or national origin from job consideration ("disparate impact discrimination"). If the employer does not show that such an exclusion is "job related and consistent with business necessity" for the position in question, the exclusion is unlawful under Title VII.

Does Title VII Prohibit Employers From Obtaining Criminal Background Reports About Job Applicants Or Employees? No. Title VII does not regulate the acquisition of criminal history information. However, another federal law, the Fair Credit Reporting Act, does establish several procedures for employers to follow when they obtain criminal history information from third-party consumer reporting agencies. In addition, some state laws provide protections to individuals related to criminal history inquiries by employers.

What Are The EEOC's Fundamental Positions On Title VII And Criminal Record Exclusions? The EEOC's basic positions are-

--The fact of an arrest does not establish that criminal conduct has occurred. Arrest records are not probative of criminal conduct. However, an employer may act based on evidence of conduct that disqualifies an individual for a particular position.

--Convictions are considered reliable evidence that the underlying criminal conduct occurred.

--National data supports a finding that criminal record exclusions have a disparate impact based on race and national origin. The national data provides a basis for the EEOC to investigate Title VII disparate impact charges challenging criminal record exclusions.

--A policy or practice that excludes everyone with a criminal record from employment will not be job related and consistent with business necessity and therefore will violate Title VII, unless it is required by federal law.

What Are The Employer's Best Practices For The Use Of Arrest And Conviction Records?

In General:

--Eliminate policies or practices that exclude people from employment based on any criminal record.

--Train managers, hiring officials, and decision makers about Title VII and its prohibition on employment discrimination.

Developing a Policy:

--Develop a narrowly tailored written policy and procedure for screening applicants and employees for criminal conduct. The policy should-

--Identify essential job requirements and the actual circumstances under which the jobs are performed.

--Determine the specific criminal offenses that may demonstrate unfitness for performing such jobs, and identify the methods for determining whether the criminal offenses have been committed, based on all available evidence.

--Determine the duration of exclusions for criminal conduct (for example, the exclusion could be that an individual cannot be considered for employment within 5 years after committing a felony), based on all available evidence and an individualized assessment of the applicant or employee in question.

--Include a justification for the policy and procedures.

--Require that a record be kept of consultations and research considered in crafting the policy and procedure.

--Require the training of managers, hiring officials, and decision makers on how to implement the policy and procedure in a manner consistent with Title VII.

Questions About Criminal Records:

--When asking questions about criminal records, limit inquiries to records for which exclusion from employment would be job related for the position in question and consistent with business necessity.

Confidentiality:

--Keep information about applicants' and employees' criminal records confidential. Use it only for the purpose for which it was intended.

Employee Benefits-Thinking About Cafeteria Plans

Tue, 01 May 2012 12:41:54 -0500

Hi! Does your company need a cafeteria plan? Well, it probably does if your employees are allowed to pay for health care coverage on a before-tax basis. Consider my article "You Need A Cafeteria Plan? Think Safe Harbor or Simple", appearing in the March, 2012 edition of the Hauppauge Reporter. Please contact me for a copy (516-307-1550 or use the blog contact procedure). Stanley

Employee Benefits-IRS Discusses The Tax Consequences of Plan Disqualification

Mon, 30 Apr 2012 09:52:40 -0500

Plan disqualification! Employers and plan administrators talk of it often, and spend a lot of time and effort avoiding it. But what are the tax consequences of a plan disqualification? The Internal Revenue Service (the "IRS") discusses these consequences in Employee Plans News, March 20, 2012. Here is what the IRS said.

Tax Consequences of Plan Disqualification

When an Internal Revenue Code section 401(a) retirement plan is disqualified, the plan's trust loses its tax-exempt status and becomes a nonexempt trust. Plan disqualification affects three groups:
1. Employees
2. Employer
3. The plan's trust

Example: Pat is a participant in the XYZ Profit-Sharing Plan. The plan has immediate vesting of all employer contributions. In calendar year 1, the employer makes a $3,000 contribution to the trust under the plan for Pat's benefit. In calendar year 2, the employer contributes $4,000 to the trust for Pat's benefit. In calendar year 2, the IRS disqualifies the plan retroactively to the beginning of calendar year 1.

Consequence 1: General Rule - Employees Include Contributions in Gross Income
Generally, an employee would include in income any employer contributions made to the trust for his or her benefit in the calendar years the plan is disqualified to the extent the employee is vested in those contributions.

In our example, Pat would have to include $3,000 in her income in calendar year 1 and $4,000 in her income in calendar year 2 to reflect the employer contributions paid to the trust for her benefit in each of those calendar years. If Pat was only 20% vested in her employer contributions in calendar year 1, then she would only include $600 in her calendar year 1 income.

Exceptions: There are exceptions to the general rule (see IRC section 402(b)(4)):

• If one of the reasons the plan is disqualified is for failure to meet either the additional participation or minimum coverage requirements (see IRC sections 401(a)(26) and 410(b)) and Pat is a highly compensated employee (see IRC section 414(q)), then Pat would include all of her vested account balance (any amount that wasn't already taxed) in her income. A non-highly compensated employee would only include employer contributions made to his or her account in the years that the plan is not qualified to the extent the employee is vested in those contributions.

• If the sole reason the plan is disqualified is that it fails either the additional participation or minimum coverage requirements, and Pat is a highly compensated employee, then Pat still would include any previously untaxed amount of her entire vested account balance in her income. Non-highly compensated employees, however, don't include in income any employer contributions made to their accounts in the disqualified years in that case until the amounts are paid to them.
Note: Any failure to satisfy the nondiscrimination requirements (see IRC section 401(a)(4)) is considered a failure to meet the minimum coverage requirements.

Consequence 2: Employer Deductions are Limited

Once the plan is disqualified, different rules apply to the timing and amount of the employer's deduction for amounts it contributes to the trust. Unlike the rules for contributions to a trust under a qualified plan, if an employer contributes to a nonexempt employees' trust, it cannot deduct the contribution until the contribution is includible in the employee's gross income.

• If both the employer and employee are calendar year taxpayers, the employer's deduction is delayed until the calendar year in which the contribution amount is includible in the employee's gross income.

• If the employer has a different taxable year than the employee (a non-calendar fiscal year), the employer cannot take a deduction for its contribution until its first taxable year that ends after the last day of the employee's taxable year in which the amount is includible in the employee's income.

For example, if the employer's taxable year ends September 30 and a contribution amount is includible in an employee's gross income for the employee's taxable year that ends on December 31 of year 1, the employer cannot take a deduction for its contribution until its taxable year that ends on September 30 of year 2.
Also, the amount of the employer's deduction is limited to the amount of the contribution that is includible in the employee's income and whether a deduction is allowed depends on whether the contribution amount is otherwise deductible by the employer. Finally, if the plan covers more than one employee and it does not maintain separate accounts for each employee (as may be the case with a defined benefit plan), then the employer is not able to deduct any contributions.

In our example, assuming both the employer and Pat are calendar year taxpayers, the employer's $3,000 deduction in calendar year 1 and $4,000 in calendar year 2 would be unchanged because that is when Pat would include these amounts in her income. However, if Pat were only 20% vested, then the employer would only be able to deduct $600 in calendar year 1 (the vested part of her employer contribution) which is the amount Pat would include in her calendar year 1 income.

Consequence 3: Plan Trust Owes Income Taxes on the Trust Earnings
The XYZ Profit-Sharing plan's tax-exempt trust is a separate legal entity. When a retirement plan is disqualified, the plan's trust loses its tax-exempt status and must file Form 1041, U.S. Income Tax Return for Estates and Trusts (instructions), and pay income tax on trust earnings.

Revenue Ruling 74-299 as amplified by Revenue Ruling 2007-48 provides guidance on the taxation of a nonexempt trust.

Consequence 4: Rollovers are Disallowed

A distribution from a plan that has been disqualified is not an eligible rollover distribution and can't be rolled over to either another eligible retirement plan or to an IRA rollover account. When a disqualified plan distributes benefits, they are subject to taxation.
Consequence 5: Contributions Subject to Social Security, Medicare and Federal Unemployment (FUTA) Taxes

When an employer contributes to a nonexempt employees' trust on behalf of an employee, the FICA and FUTA taxation of these contributions depends on whether the employee's interest in the contribution is vested at the time of contribution. If the contribution is vested at the time it is made, then the amount of the contribution is subject to FICA and FUTA taxes at the time of contribution. The employer is liable for the payment of FICA and FUTA taxes on them. If the contribution is not vested at the time it is made, then the amount of the contribution and its earnings are subject to FICA and FUTA taxation at the time of vesting. For contributions and their earnings that become vested after the date of contribution, the nonexempt employees' trust is considered the employer under IRC section 3401(d)(1) who is responsible for withholding from contributions as they become vested.

Calculating Specific Plan Disqualification Consequences

Calculating the tax consequences of plan disqualification depends on the type of retirement plan. For example, the tax consequences for a 401(k) plan differ from the consequences for a SEP or SIMPLE IRA plan.

How to Regain Your Plan's Tax-Exempt Status

Generally, if a plan loses its tax-exempt status, the error that caused it to become disqualified must be corrected before the IRS will re-qualify the plan. You may correct plan errors through the IRS Voluntary Correction Program. However, if your plan is under examination by the IRS, you must correct the errors through the Audit Closing Agreement Program.

Note: This is a general overview of what happens when a plan becomes disqualified for failure to meet qualification requirements (see IRC section 401(a)). These examples provide general information and you should not rely on them as legal authority as they do not apply to every situation. For more information, see Rev. Rul. 74-299 and Rev. Rul. 2007-48 (and the law and regulations discussed in those rulings).

Author's Comment: This is some pretty complicated stuff-stay qualified!

Employee Benefits-IRS Issues Proposed Regulations On New Fee Imposed On Self-Insured Health Care Plans

Fri, 27 Apr 2012 11:31:02 -0500

On April 12, 2012, the Internal Revenue Service (the "IRS") issued proposed regulations on the new fee imposed on self-insured health care plans. The proposed regulations are here.

The fee is governed by section 4376 of the Internal Revenue Code (the "Code"), and works as follows under that Code section. The fee is imposed on a "plan sponsor" of an "applicable self-insured health plan", for each plan year ending on or after October 1, 2012, and before October 1, 2019. The fee is two dollars (one dollar for plan years ending before October 1, 2013) multiplied by the average number of lives covered under the plan for the plan year. The fee may be increased, for plan years ending on or after October 1, 2014, based on increases in the projected per capita amount of national health expenditures.

The fee is paid by the "plan sponsor", generally defined as (1) the employer in the case of a plan established or maintained by a single employer, (2) the employee organization in the case of a plan established or maintained by an employee organization or (3) the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan, in the case of (a) a plan established or maintained by two or more employers or jointly by one or more employers and one or more employee organizations, (b) a multiple employer welfare arrangement (as defined in section 3(40) of ERISA) (a MEWA"), or (c) a voluntary employees' beneficiary association described in section 501(c)(9) of the Code (a "VEBA").

An "applicable self-insured health plan" is any plan which provides accident or health coverage, if (1) any portion of the coverage is provided other than through an insurance policy and (2) the plan is established or maintained, generally, by (a) one or more employers for the benefit of their employees or former employees, (b) one or more employee organizations for the benefit of their members or former members, (c) jointly by one or more employers and one or more employee organizations for the benefit of employees or former employees, (d) a VEBA, or (e) a MEWA not described above.

Author's Comment: This fee is found in section 4376 of the Code, which was added to the Code by the Patient Protection and Affordable Care Act ("PPACA"). The fate of PPACA, and thus the fee, will depend on a decision of the U.S. Supreme Court, which will probably be issued in June. Stay tuned.

Employment-EEOC Reissues Enforcement Guidance On Employer Use of Arrest and Conviction Records To Make Employment Decisions

Thu, 26 Apr 2012 14:34:36 -0500

According to a Press Release (4/25/12), the Equal Employment Opportunity Commission (the "EEOC") has revised its Enforcement Guidance, initially issued over 20 years ago, on employer use of arrest and conviction records in employment decisions under Title VII of the Civil Rights Act of 1964, as amended ("Title VII"). The EEOC has also issued a Question-and-Answer (Q&A) document about the guidance. The new Enforcement Guidance and Q&A document are available on the EEOC's website at www.eeoc.gov.

The Press Release says the following. While Title VII does not prohibit an employer from requiring applicants or employees to provide information about arrests, convictions or incarceration, it is unlawful to discriminate in employment based on race, color, national origin, religion, or sex. The new guidance builds on longstanding guidance documents that the EEOC issued over twenty years ago. The new Enforcement Guidance is predicated on, and supported by, federal court precedent concerning the application of Title VII to employers' consideration of a job applicant or employee's criminal history and incorporates judicial decisions issued since passage of the Civil Rights Act of 1991. The new guidance also updates relevant data, consolidates previous EEOC policy statements on this issue into a single document and illustrates how Title VII applies to various scenarios that an employer might encounter when considering the arrest or conviction history of a current or prospective employee. Among other topics, the new guidance discusses:

• How an employer's use of an individual's criminal history in making employment decisions could violate the prohibition against employment discrimination under Title VII;

• Federal court decisions analyzing Title VII as applied to criminal record exclusions;

• The differences between the treatment of arrest records and conviction records;

• The applicability of disparate treatment and disparate impact analysis under Title VII;

• Compliance with other federal laws and/or regulations that restrict and/or prohibit the employment of individuals with certain criminal records; and

• Best practices for employers.