Category Archives: Vesting

8th Circuit Decides Signed Letter to Participants Plus SPD Equals Amendment

In Halbach v. Great-West Life & Annuity, No. 07-3865/07-3867 (CA8 April 13, 2009), the 8th Circuit Court of Appeals recently addressed what constitutes a valid amendment to an employee welfare benefit plan. In 2004, Great-West provided a package of medical coverage to both active employees and former employees who were also receiving long-term disability benefits. That package included health, vision, dental, and prescription drug benefits, and life insurance coverage.

In late 2004, Great-West decided to cease providing medical coverage to the long-term disability claimants, and mailed all participants a letter advising them of the changes to the plan effective January 1, 2005. Specifically, the letter stated:

    “effective December 31, 2004, ‘medical benefits will no longer be continued for current or future Long Term Disability claimants.’ Further, the letter stated that ‘due to the change in the 2005 benefit package, your health coverage will terminate December 31, 2004, and you will be offered the option to elect coverage under COBRA.”

The letter was signed by one of Great-West’s officers. Along with the letter, Great-West mailed all participants an unsigned summary plan description (SPD).

The participants who were former employees also receiving long-term disability benefits brought a lawsuit against Great West, claiming that the letter did not constitute a valid amendment to the plan. The Court found that it did constitute a valid amendment to the plan. In making this determination, the Court looked at the language in the plan document, which stated:

    “5.1 Amendment of the Plan. The Company reserves the right at any time or times to amend the provisions of teh Plan to any extent and in any manner that it may deem advisable, by a written instrument signed by an officer of the company; provided, however, that no such modification shall divest a Participant of benefits under the Plan to which he has become entitled prior to the effective date of the amendment.”

Applying this language, the Court found that the letter and the SPD, when reviewed together in harmony with each other, constituted a valid amendment to the Plan because it was a written instrument signed by an officer of the company.

The former employees also claimed that benefits were vested at the time Great-West made its decision to eliminate them, and, as such, Great-West violated the plan’s terms by discontinuing them.

The Court stated that, unlike pension benefits, ERISA does not mandate vesting for employee welfare benefit plans. Because of this, the only way the benefits discontinued by Great-West could have become vested is if the plan document provided vesting for these benefits. The Court found, after reviewing Section 5.1, that the plan language was ambiguous as to whether Great-West intended to vest these benefits. For this reason, the Court reversed the district court’s grant of summary judgment, and remanded the case for a trial on the issue of whether the welfare benefits were vested.

[tag]pension protection act, ppa, vesting, amendment, halbach, Great-West, 8th Circuit, ERISA[/tag]

Who is an Affected Participant at Plan Termination

When a plan terminates, the IRS says that affected participants become 100% vested in their account balances. More specifically, this requirement is from Internal Revenue Code section 411(d)(3), which states:

(3) Termination or partial termination; discontinuance of contributions. Notwithstanding the provisions of subsection (a), a trust shall not constitute a qualified trust under section 401(a) unless the plan of which such trust is a part provides that –

    (A) upon its termination or partial termination, or
    (B) in the case of a plan to which section 412 does not apply, upon complete discontinuance of contributions under the plan,

the rights of all affected employees to benefits accrued to the date of such termination, partial termination, or discontinuance, to the extent funded as of such date, or the amounts credited to the employees’ account, are nonforfeitable.

So how does an employer determine who is an affected participant so that particular participant’s vesting can be increased to 100%?

In a FAQ on plan termination, the IRS states that:

an “affected participant” in a plan termination, generally, is one who has an accrued benefit under the plan as of the date of the plan’s termination. Certain terminated employees are also treated as affected participants.

In the Treasury Regulations which provide guidance on IRC section 411(d)(3), the IRS does not define “affected participant”. This has left the court system to interpret who an affected participant is.

For example, the 6th Circuit Court of Appeals, in Borda v. Hardy, Lewis, Pollard, et al., 1998 Fed. App. 0075P, found that participants were not affected participants entitled to having their vesting increased to 100%. The participants terminated their employment and left their account balances in the plan. Subsequently, the employer went out of business which terminated the plan before the participants had incurred five consecutive breaks in service. The participants then sought 100% of their account balances, arguing that their vesting should be increased to 100% due to the termination of the plan.

The 6th Circuit, discussing IRS General Counsel Memorandum, GCM 39310 (April 1, 1994), found that:

the General Counsel Memorandum concluded that “an employee who separates from service but will not suffer a forfeiture until he incurs a break-in- service will become vested in his accrued benefit, to the extent funded, if the plan terminates prior to his incurring a break- in-service.”

Implicit in this conclusion, we believe, is an understanding that the employee who had separated from service was one who still stood to be “affected” by the termination of the plan. Nothing in the General Counsel Memorandum suggests that a former employee who would clearly be unable to avoid a forfeiture by returning to work, the employer having gone out of existence, could somehow be “affected” by a termination of the plan at the time of the employer’s dissolution.

The 6th Circuit then discussed a case decided by the 9th Circuit Court of Appeals, Flanagan v. Inland Empire Electrical Workers Pension Plan & Trust, 3 F.3d 1246 (9th Cir. 1993), which determined that a terminated participant is an affected participant entitled to 100% vesting due to the plan termination:

because it extinguished their opportunity . . . to return to covered employment and to revive their prior service credits.” Id . at1250.

The 6th Circuit states that the difference between their case and Flanagan is that, in Flanagan, the plan terminated but the employer did not go out of business, so the terminated participants could have been re-employed by the employer.

In both Borda and Flanagan, the 6th Circuit noted that the plan document did not define “affected participant”.

[tags]vesting, plan termination, terminate, affected participant, participant, 411(d)(3), pension, retirement, ERISA[/tags]

11th Circuit Goes Retro

On June 28, 2007, the Court of Appeals for the 11th Circuit issued an interesting opinion about an employee whose benefits were denied due to the plan adopting an amendment which changed the way hours of service are calculated for vesting credit purposes. (Hat tip to Brian King of Brian King’s ERISA Blog, who refers to this opinion as Federal Judges: ERISA Makes Our Heads Hurt).

In Gilley v. Monsanto Co. Inc., ___ F.3d ___, 2007 U.S. App. LEXIS 15353 (11th Cir. 2007), the court found that the district court erred in concluding that the plan amendment adopting the 95-Hour Rule could not be applied to the employee because the amendment was adopted after the employee started earning years of service for vesting purposes but before he was vested.

When the employee, Gilley, started working for Monsanto in 1972, Monsanto’s defined benefit plan contained a 10-year cliff vesting schedule. Gilley worked for Monsanto for 4 months in 1972. Gilley continued working for Monsanto until February 16, 1982, when he was terminated after being laid off in March of 1981 due to Monsanto closing a plant. Gilley filed suit against Monsanto after Monsanto denied his claim for pension benefits, stating that at the time his employment terminated, he was not vested under the plan. Monsanto determined Gilley’s hours of service in 1972 for vesting purposes using the 95-Hour Equivalency Rule, which Monsanto adopted by amendment in 1981. Using this equivalency rule, Monsanto determined that Gilley was not entitled to a year of vesting credit for 1972 because they credited him with 887.2 hours of service. The opinion does not contain an explanation of why the court was deciding this in 2007 for an employee whose employment was terminated in 1982.

One important fact to remember when reading the opinion is that ERISA was enacted in 1974, two years after Gilley began working for Monsanto, so the Monsanto’s plan in 1972 was a pre-ERISA plan. Even though the Court was deciding a pre-ERISA issue, the way the Court reaches its conclusion is very interesting.

Monsanto adopted the amendment implementing the 95-Hour equivalency rule in 1981. The Court states that the record was not clear when the amendment was adopted but is was adopted between 1979 and January of 1981. Monsanto closed the plant where Gilley worked in March of 1981. The district court found that the amendment did not apply to Gilley, because “later amendments to the Plan should not have an effect on the 1972 calculations if they impact adversely on plaintiff’s entitlement”.

The 11th Circuit disagreed with the district court, finding that the amendment did apply to Gilley because it was adopted before Gilley was vested. The Court reasoned that because Gilley was not vested, the amendment did not violate the anti-cutback rule in ERISA Code section 204(g). Stating that the plain language of ERISA Code section 203 states that it applies to benefits that are nonforfeitable, and Gilley’s rights were not nonforfeitable yet because he was not yet vested, ERISA Code section 203 was not violated.

In reaching this decision, the Court discussed the standard of review to be given to an administrator’s decision. The Court stated:

ERISA does not explicitly establish the standard of review to be applied to a plan administrator’s decision. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 109, 109 S. Ct. 948, 953 (1989). Following the Supreme Court’s direction, however, we have adopted three different standards to guide us: (1) de novo review applies where the plan administrator has been given no discretion in deciding claims; (2) arbitrary and capricious review applies where the plan administrator has discretion in deciding claims and does not suffer from a conflict of interest; and (3) heightened arbitrary and capricious review applies where the plan administrator has discretion but suffers from a conflict of interest. HCA Health Servs. of Ga., Inc. v. Employers Health Ins. Co., 240 F.3d 982, 993 (11th Cir. 2001). For purposes of that third standard, a conflict of interest exists when a provider has to pay benefit claims out of its own assets, making it directly advantageous to the provider for the claims to be denied. These three standards have been broadly applied to both the administrator’s interpretation of plan provisions as well as the administrator’s decision to grant or deny benefits. Williams v. Bellsouth Telecomms., Inc., 373 F.3d 1132, 1135 n.3 (11th Cir. 2004); Paramore v. Delta Air Lines, Inc., 129 F.3d 1446, 1451 (11th Cir. 1997).

[tags]vesting, hours of service, years of service, amendment, administrator, pension, retirement, ERISA[/tags]

IRS Clarifies Full Vesting on Partial Termination

Recognizing when a plan has partially terminated is important and sometimes overlooked. For both participants and plan sponsors, the finding of a partial termination is an important plan event because participants who were partially vested before the partial termination event will become fully vested due to the partial termination.

In Revenue Ruling 2007-43, issued today by the IRS, the Service confirmed that if the turnover rate for an employer is at least 20%, there is a presumption that a partial termination of the plan has occurred. In Rev. Rul. 2007-43, the employer ceased operations at one of its four business locations. Closing that location resulted in 23% of the participants in the employer’s defined contribution plan ceasing active participation in the plan because their employment was terminated. The IRS found that a partial termination occurred and those affected employees became 100% vested in their account balances due to the partial termination.

The IRS has had a long-standing rule on partial termination of a plan resulting in 100% vesting for the affected participants. Treasury regulation 1.411(d)-2(b)(1) provides that it is a facts-and-circumstances test to determine whether a partial termination has occurred. Internal Revenue Code section 411(d)(3) provides that if a partial termination occurs, the affected participants become 100% vested in their account balances.

Not every situation resulting in at least a 20% turnover rate will create a partial termination. The IRS said that it is a facts-and-circumstances test. Factors such as the extent to which terminated employees were replaced, whether the new employees performed the same functions, had the same job classification or title, and received comparable compensation, along with the turnover rate during other periods in the company’s history, are all relevant factors to consider when determining whether a partial termination has occurred.

The IRS also stated that a partial termination can occur for reasons other than the turnover rate, including plan amendments which adversely affect the rights of employees to vest in benefits under the plan, plan amendments that exclude a group of employees who have previously been covered by the plan, or a reduction or cessation of future benefit accruals resulting in a potential reversion to the employer.

How does the IRS learn of the turnover rate? There are at least two ways – Form 5310 and Form 5500. Line 15 of Form 5310, filed with the IRS as part of a determination letter request when a plan terminates, requires identifying the number of plan participants in the year of plan termination, as well as the previous five years before termination. Form 5310 also requires the plan sponsor to identify the number of participants each year who separated without being fully vested. Line 7 of Form 5500 identifies the number of participants who terminated employment during the plan year who were less than 100% vested. On audit, or as part of a determination letter application for a terminated plan, the IRS can request copies of Form 5500 filed by the employer for any year relevant to the determination. Some simple math using the information provided on Form 5500 and Form 5310 will provide the turnover rate to the IRS.

[tags]IRS, partial termination, vesting, 5500, 5310, 2007-43, pension, retirement, ERISA[/tags]

When Service Begins for Vesting Credit

The new immigration bill, the Comprehensive Immigration Reform Act of 2007 (S. 1348), raises another question. If alien, or undocumented, workers are recognized as employees for qualified plan purposes in plans which previously did not recognize them as eligible employees, what service will count for vesting purposes?

I think the answer is to this question is contained in Code Section 411‘s provision that all service is counted unless specifically excluded by IRC section 411(a)(4), not just service while a participant. The new immigration bill does not include an amendment which adds an exception to Internal Revenue Code section 411(a)(4) to exclude years for vesting credit purposes during periods when a worker was undocumented or during periods when a worker is not a participant.

What is vesting? Vesting is one of those concepts unique to retirement plans and is a crucial building block in plan documents. Vesting is also something pension geeks discuss just about every day, and the average worker probably rarely thinks about until they leave a job and receive a statement saying that they are only receiving a portion of their account balance because they are not fully vested.

How much each employee is vested is updated each year as part of the annual plan administration, and provided to each employee at least once a year, thanks to Section 508 of the Pension Protection Act, which requires that pension benefit statements include vesting information. Simply stated, vesting is the portion of an employee’s benefit which becomes non-forfeitable each year. For example, assume a qualified plan document contains a three year cliff vesting schedule, which means, according to Internal Revenue Code section 411(a)(2)(B), that the plan document provides that:

an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee’s accrued benefit derived from employer contributions.

For example, assume that an employer sponsors a plan with a requirement that to become a participant, the employee must complete a year of service. The employer then makes a profit sharing contribution on December 31st each year of $2,000 for each participant who completes a year of service each year. The employer hires Employee Bob on July 4, 2004. On December 31, 2004, Bob has completed more than 1,000 hours of service, so Bob becomes a participant on the next entry date. Assume the plan has two semi-annual entry dates of January 1st and July 1st, so Bob enters the plan on January 1, 2005. In 2005, Bob completes a year of service, so the employer contributes $2,000 into his profit sharing account. Same thing happens on December 31, 2006, so Bob has $4,000 of employer contributions in his profit sharing account on December 31, 2006. Bob is unhappy on December 31, 2006, and makes a New Year’s Resolution to find a new job.

If Bob’s employer counts years of service for vesting purposes from the anniversary date of Bob’s employment, Bob won’t be 100% vested in his account until the third anniversary of his employment date. This means that if Bob quits employment on July 3, 2007, before his third anniversary date, he forfeits his profit sharing account balance and will receive zero because he is zero percent vested. Yes, this means his entire $4,000 account balance in his profit sharing account will be forfeited. Depending on the language in the plan document, the employer can use the forfeited $4,000 to pay plan expenses, apply it to a future profit sharing contribution for the remaining employees, or allocate it to the remaining employees as an additional profit sharing contribution. If Bob quits on July 5, 2007, after he is credited with 3 years of vesting credit, he is entitled to 100% of his account balance, or the entire $4,000.

Bob’s employer is not required to count years of service on the anniversary date of his employment date. Instead of counting years of service from the date of employment and on every anniversary date of employment, the plan document can include a provision that after the first year of employment, the employee’s year of service will switch to the plan year. Assume that the plan year is the same as the calendar year. If Bob’s employer uses this provision, then, for vesting purposes, Bob is credited with a year of service on July 1, 2005, the one year anniversary of his employment date. His vesting credit period then switches to the calendar year. If he completes a 1,000 hours of service between January 1, 2005, and December 31, 2005, he is granted a second year of vesting credit on December 31, 2005. If he completes a third year of service in 2006, he then is fully vested on December 31st, 2006, and will receive 100% of his account balance if he quits after that date.

These two examples assume that all service is counted for vesting purposes, and one of the exceptions in Code section 411(a)(4) does not apply. ERISA attorneys like to say that not every vesting year is credited equally. For crediting vesting service, Internal Revenue Code section 411 does not count some years for vesting credit. Code section 411(a)(4) states:

In computing the period of service under the plan for purposes of determining the nonforfeitable percentage under paragraph (2), all of an employee’s years of service with the employer or employers maintaining the plan shall be taken into account, except that the following may be disregarded:

    (A) years of service before age 18,
    (B) years of service during a period for which the employee declined to contribute to a plan requiring employee contributions;
    (C) years of service with an employer during any period for which the employer did not maintain the plan or a predecessor plan (as defined under regulations prescribed by the Secretary);
    (D)service not required to be taken into account under paragraph (6);
    (E) years of service before January 1, 1971, unless the employee has had at least 3 years of service after December 31, 1970;
    (F) years of service before the first plan year to which this section applies, if such service would have been disregarded under the rules of the plan with regard to breaks in service as in effect on the applicable date; and
    (G) in the case of a multiemployer plan, years of service –

      (i) with an employer after –

        (I) a complete withdrawal of that employer from the plan (within the meaning of section 4203 of the Employee Retirement Income Security Act of 1974), or
        (II) to the extent permitted in regulations prescribed by the Secretary, a partial withdrawal described in section 4205(b)(2)(A)(i) of such Act in conjunction with the decertification of the collective bargaining representative, and

      (ii) with any employer under the plan after the termination date of the plan under section 4048 of such Act.

While some of these exceptions are not fair, they are clear. A worker who is age 17 and completes a year of service can have an employer who excludes that year of service from vesting credit simply because it was earned before the worker attained age 18. Code section 411(a)(4) permits excluding this year. For a year of service not to be credited for vesting purposes, it must fit within one of the exceptions under Code section 411(a)(4).

[tags]Pension Protection Act, ppa, immigration, S. 1243, Comprehensive Immigration Reform Act, vesting, year of service, retirement[/tags]