Working Hard For Working People

Lehman Brothers Pension Plan Taken Over by PBGC

A bankruptcy court has agreed to the PBGC taking over the Lehman Brothers Pension Plan.  The PBGC had to step in to become the sponsor of the plan because the firm's assets have been liquidated and none of the buyers took on responsibility for the pension plan.  The pension plan covers 22,000 workers and retirees of Lehman Brothers.

The Lehman Brothers Pension Plan was short $115 million when the plan ended on December 12, 2008.  According to the Pension Protection Act of 2006, the maximum guaranteed pension PBGC can pay is determined by the legal limits in effect on the date of the plan sponsor's bankruptcy or September 15, 2008.

More information regarding the takeover of the Lehman Brothers Pension Plan can be found at www.pbgc.gov

 

Status of GM's Pension Plans

On June 1, 2009, General Motors Corp. (GM) filed for bankruptcy in what is being called the second largest industrial bankruptcy in United States history.  However, GM's two defined benefit pension plans are not being terminated and will continue to be sponsored by GM.  The PBGC will continue to insure the two plans, one plan for hourly workers and the other plan for salaried employees.  (PBGC News Release, 6/1/2009)  In addition, all interested parties (GM, the United Auto Workers and the U.S. government) have agreed to continue the plans under the sponsorship of a new corporate entity to be established from the sale of GM's productive assets.  The PBGC will be monitoring this transition to insure the best interests of the more than 670,000 pension plan participants are protected.

ERISA Funds are Investing in Private Equity to Further Diversify Portfolios

Pension funds and health funds are turning to private equity to further diversify their investment portfolios.  Private equity consists of equity investments in unregistered securities of private companies.  The equity obtained by the private companies is used to start or grow companies or to expand or restructure older companies.  Some examples of well-known private equity investments include Intel, Apple Computer, Fed Ex, Microsoft, Amazon.com, Google and Chrysler.

The downside to investing in private equity is the limited liquidity because these investments are for the long-term (10-12 years).  Also, these investments are complex, the fees are often higher and there is less transparency.  On a positive note, investing in private equity is a good diversification investment which can yield higher returns in the long run. 

Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA)

The current Mental Health Parity Act (MHPA) forbids group health plans from imposing annual dollar limits or lifetime dollar limits on mental health benefits that are different than the limits for surgical or medical benefits.  According to the Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA), the new law still includes these requirements but now the MHPAEA expands mental health benefits to include substance use disorder benefits and addresses other non-financial limits.

The new law takes effect for plan years beginning on and after January 1, 2010.  The MHPAEA applies to plans that already cover mental health or substance use disorder benefits.  The new law does not require group health plans to provide mental health or substance use disorder benefits.

You can find more information on the Department of Health & Human Services website.

Types of Qualified Retirement Plans

ERISA divides employee benefit plans into two categories: "pension plans" and "welfare plans."

A defined benefit pension plan generally provides a benefit which is payable as a life annuity at normal retirement age.  Usually the benefits are based on the employee's years of service in covered employment and compensation.  Actuarial factors or a formula are used to determine the amount of an employee's benefit.

Profit sharing pension plans are individual account plans that allow employee's to share in their employer's profits.  A stock bonus plan is just like a profit sharing plan except instead of cotnributions and distributions, employees receive the employer's stock.

A money purchase pension plan is a type of defined contribtuion plan.  An employer is obligated to contirubte at a rate specified in the plan with no connection to an employer's profits.  Each employee has their own individual account.

An employee stock ownership plan or ESOP is another type of defined contribution plan that can be either a stock bonus plan or a combined stock bonus and money purchase plan.  An ESOP invests primarily in employer securities.

A 401(k) plan allows employees to make pre-tax contributions out of their pay into their own accounts.  The employer can make additional contributions in the form of profit-sharing contributions to employee's accounts. 

Qualified Domestic Relations Orders

A Qualified Domestic Relations Order (QDRO) is a divorce decree or order which: (1) assigns rights to an alternate payee to receive all or a portion of benefits that are payable to a participant under a pension plan; (2) provides for child support, alimony or marital property rights to a participant's dependent(s); and (3) is subject to a state's domestic relations law, within the proper court jurisdiction.  An alternate payee may be a spouse, former spouse, child or other dependent of the participant.

When the plan administrator of a pension fund receives a proposed QDRO, the plan administrator must separately account for and invest the amounts affected by the order and send written notice of such order to all the parties affected by the order, along with the plan's QDRO procedures.

There is certain criteria for qualifying domestic relations orders assigning pension benefits to an alternate payee and if the criteria is not met, the plan administrator cannot qualify the proposed order.

Pension Protection Act of 2006 Requires a New Annual Funding Notice

The Pension Protection Act of 2006 (PPA) was enacted to improve the financial condition and to provide transparency on the financial state of pension plans.  In the past, participants of a pension plan were sent an Annual Funding Notice and a Summary Annual Report but these documents were sent late in the following year after the close of a plan year.  The PPA has combined these two documents into a single Annual Funding Notice which is much more detailed and this notice is required to be distributed within four months after the end of a plan year to provide more timely information about a plan's financial status.

Depending on the financial status of a plan, according to the PPA, the plan is assigned a zone category:

1.  "Green zone" pension plans are in good financial health;

2.  "Yellow zone" pension plans are considered "endangered" or "seriously endangered;"

3.  "Red zone" pension plans are considered "critical."

Basically, the trustees of plans in the "green zone" do not have to take any action.  However, trustees of plans in the "yellow" or "red" zones are required to take immediate corrective action to improve the financial health of their plans.  Unfortunately, the major downturn of the financial markets in 2008 and 2009 have negatively affected most pension plans and trustees of most pension plans have had to adopt a Funding Improvement Plan to improve the financial status of their plans. 

Disability Benefits

In Leger v. Tribune Co. Long Term Disability Benefit Plan, the Seventh Circuit determined that the benefit plan did act arbitrarily when it terminated a participant's benefits for knee problems without considering the complete history of the participant's knee problems spanning twenty years.

The participant of the benefit plan suffers from osteoarthritis in both knees.  She was approved for long-term disability benefits in December of 1990.  The participant received benefits for almost fifteen years and during those years had numerous surgeries and procedures performed on both knees.  In 2005, the benefit plan acquired a new administrator (Met Life) who requested updated information from the participant's treating physician.  Based on the updated information, Met Life determined that the participant was capable of performing sedentary work and terminated her benefits in October of 2005. 

When determining whether a decision to terminate benefits was arbitrary and capricious, the court looks to whether specific reasons for denial were communicated to the claimant, whether the claimant was afforded an opportunity for full and fair review by the administrator and whether there is an absence of reasoning to support the plan's determination.  Since the benefit plan failed to consider the participant's complete medical history and rejected, without explanation, important aspects of the functional capacity evaluation, the Seventh Circuit held the benefit plan acted in an arbitrary and capricious manner in terminating the participant's benefits.

Are all 401(k) plans required to provide hardship distributions?

A 401(k) retirement plan may allow participants to get a hardship distribution but the law does not require retirement plans to provide hardship distributions.  If a 401(k) plan does provide for hardship distributions, the plan has to have specific criteria in place to make the determination of what constitutes a hardship.  According to the Internal Revenue Service, a hardship for a 401(k) plan must be made on account of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need.  An employee's need does include the need of the employee's spouse or dependent.  (Reg. Section 1.401(k)-1(d)(3)(i)). 

A distribution may be deemed to satisfy an immediate and heavy financial need of the employee if the distribution is for:

1.  Expenses for medical care;

2.  Costs directly related to the purchase of a principal residence for the employee (mortgage payments are excluded);

3.  Payment of tuition, related educational fees, and room and board expenses;

4.  Payments necessary to prevent the eviction of the employee from the employee's principal residence or foreclosure on the mortgage on the employee's principal residence;

5.  Funeral expenses; or

6.  Certain expenses relating to the repair of damage to the employee's principal residence.

Once an immediate and heavy financial need is established, it has to be determined whether the hardship distribution is necessary to satisfy the financial need.  If all of the following requirements are satisfied, then a distribution is deemed necessary to satisfy an immediate and heavy financial need:

1.  The distribution cannot be more than the amount of the immediate and heavy financial need;

2.  The employee has received all distributions, other than hardship distributions, and all nontaxable loans currently available to the employee under all plans maintained by the employer;

3. The employee is not allowed to make elective contributions and employee contributions to the 401(k) plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution.

For more information, review the specifics of your 401(k) plan published in the plan's summary plan description or check out the Internal Revenue Service website at www.irs.gov.

Disclosure Violation

In Mondry v. American Family Mutual Insurance Co., No. 07-1109, (7th Cir. March 5, 2009), the Seventh Circuit held that a health plan administrator can be penalized for failing to provide a plan participant with certain documents upon request.

The plaintiff in this case sought reimbursement from her health plan for speech therapy her son was receiving.  She was advised by the plan administrator that the therapy was not covered by the plan because it was "educational or training" and "not restorative."  Over the course of sixteen months, the plaintiff repeatedly requested the plan documents containing the language the claims administrator had relied in denying her claim for benefits.  Once the documents were produced, the provisions of the documents were inconsistent with the governing language of the insurance plan and it became apparent that the claims administrator had inappropriately denied the plaintiff's claim for reimbursement.

The plaintiff filed suit contending that the plan and claims administrator had violated a statutory obligation to produce plan documents and misrepresented the terms of the plan to her in violation of their fiduciary duties.  The Seventh Circuit agreed with the district court that the claims against the claims administrator be dismissed.  However, the Seventh Circuit also determined that American Family failed in its statutory obligation to produce the plan documents under section 1024(b)(4) and that American Family was liable for statutory penalties.  As to the fiduciary breach count, the court held the plaintiff was entitled to a trial on that count.