In Weekend Warrior Trailers, Inc., et al. v. Commissioner, T.C. Memo 2011-105 (May 19, 2011), the U.S. Tax Court addressed a tax deficiency resulting from a fancy corporate two-step that included the creation and demise of an ESOP within a 3-year time period.

In 1988, Mark Warmoth started a company. 

In 1995, he incorporated it as a C-corp and named it Weekend Warrior. 

On January 1, 2003, Weekend Warrior elected S corporation status.  From 1995 through 2009, Mr. Warmoth was the only shareholder of Weekend Warrior.

On Nov. 14, 2002, Mr. Warmoth incorporated Leading Edge and received all 10,000 of Leading Edge’s shares of stock.  According to the Tax Court, Mr. Warmoth was suppose to pay $20,000 for the shares but failed to do so.  Leading Edge also elected S corporation status.  Mr. Warmoth was the only member of Leading Edge’s board of directors, its CEO and President.  Leading Edge and Weekend Warrior shared the same address and phone number.   

Effective Dec. 15, 2002, Leading Edge established a deferred compensation (NQDC) plan to benefit Mr. Warmoth.  The Board, which consisted solely of Mr. Warmoth, was to decided annually which employees were entitled to participate in the NQDC plan. 

On Dec. 28, 2002, Leading Edge adopted an ESOP and a 401(k) plan, effective Dec. 1, 2002, with Mr. Warmoth and one other person as trustees.  On Dec. 18, 2002, Mr. Warmoth sold 9,990 shares of Leading Edge stock to the ESOP for $1.50 per share, leaving Mr. Warmoth with the remaining 10 shares of Leading Edge stock.  The plan executed a promissory note to Mr. Warmoth for the shares for $14,985.        

Also on Dec. 28, 2002, Weekend Warrior and Leading Edge entered into an agreement signed by Mr. Warmoth on behalf of both companies.  Leading Edge agreed to provide design, personnel and management services to Weekend Warrior.  In exchange, Weekend Warrior paid Leading Edge an initial payment of $4,175,000 plus agreed to make monthly payments to Leading Edge based upon Weekend Warriors’ gross sales with Leading Edge guaranteed a minimum monthly payment.  As part of the personnel agreement, in 2003 Weekend Warrior transferred all of their employees to Leading Edge, and Leading Edge leased those employees back to Weekend Warrior at a mutually-agreed to rate. 

On June 1, 2004, Leading Edge executed a stock repurchase agreement and acquired all 9,990 shares of its stock from the ESOP for $150,000.  The Tax Court states that the reason for this transaction was the change to Code section 409(p) which made the ESOP unattractive.  After the stock repurchase, Mr. Warmoth again became Leading Edge’s sole shareholder.  

After Dec. 31, 2004, Leading Edge became inactive and, according to the Tax Court, the ESOP was terminated and converted into a profit-sharing plan. 

The IRS challenged the deductions Weekend Warrior paid to Leading Edge for design and management fees for 2002, 2003 and 2004.  The IRS did not challenge the amounts paid between the two companies for personnel services. 

The IRS argued that Leading Edge should be disregarded for Federal income tax purposes because it lacked a legitimate business purpose and economic substance and was formed solely for the purpose of obtaining tax benefits.  Mr. Warmoth argued that there were several potentially legitimate reasons for incorporating Leading Edge, including the desire to motivate the rank-and-file employees by establishing an ESOP.  The Tax Court rejected that reason, stating that viewing the ESOP through the lens of the deferred compensation plan that solely benefited Mr. Warmoth cast doubt that the benefits to rank-and-file employees were more than minimal. 

The Tax Court did find that, even though Leading Edge was not formed for a valid business purpose, it engaged in sufficient business activity to be respected as a separate entity for tax purposes.  Some of that sufficient business activity included providing personnel services to Weekend Warrior, maintaining investment and bank accounts, paying its employees by check, adopting a retirement plan, keeping books and records, engaging a professional to appraise its stock and following corporate formalities.

Even though the Tax Court found that Leading Edge was a separate entity for tax purposes, the Tax Court agreed with the IRS, in part, finding that the management fees were not necessary or reasonable, and therefore were not deductible under Code section 162.

The IRS also challenged the sale of Leading Edge stock to the ESOP, stating that it lacked a business purpose because the true purpose of establishing the ESOP was not to provide an incentive for the employees due to the short lifespan of the plan and the fact that as soon as the changes to Code section 409 made the ESOP arrangement less appealing from a tax standpoint, the retirement plan’s shares were redeemed and the company’s founder once again became Leading Edge’s sole shareholder.  Because the IRS first asserted this issue on brief, the Tax Court declines to consider whether the sale of Leading Edge stock to the retirement plan lacked a business purpose.

In 1994, Charles Jenkins started receiving long-term disability benefits under Price Waterhouse’s plan. In 1988, he had tested positive for HIV. In 1989, when he was 27 years old, he started working for Price Waterhouse. By the end of 1993, he was no longer able to work due to serious health problem. In 1994, the plan defined disability as the inability to perform one’s own occupation. In 1999, that definition became unable to perform any occupation within one’ qualifications. There is no dispute that in 1994, Mr. Jenkins met the plan’s definition of disability and started receiving long-term disability benefits. There is also no dispute that in 1999, when the definition changed to the stricter definition of unable to perform any occupation, Mr. Jenkins met that stricter definition and thus continued to receive benefits under the plan.

In 2006, Mr. Jenkins’ benefits under the plan were terminated, and Mr. Jenkins appealed that decision. The 7th Circuit upheld the decision of the district court, which found in favor of Price Waterhouse, stating that the difference between 1994 and 2006 were a change in Mr. Jenkins’ overall condition due to improved treatment for treating AIDS. Specifically, the 7th Circuit found:

“But Jenkins fails to recognize what CGLIC (and the general population, it seems) thought HIV and AIDS meant in the early 1990s. That impression was that HIV (and certainly AIDS) brought rapid death. Thankfully, the prognosis has changed – in large measure due to new drugs – both for Jenkins and countless others. It was not ‘downright unreasonable’ for CGLIC to shift its position along with that change when the medical evidence supported it.”

The “downright unreasonable” standard applied by the Court is from Davis v. Unum Life Ins. Co. of Am., 444 F.3d 569, 576 (7th Cir.). It states that court cannot reverse the district court’s decision unless the decision is “downright unreasonable”. Finding that the plan administrator’s decision to terminate Mr. Jenkins’ benefits had “rational support in the record” as it was supported by opinions from 4 medical professionals, the 7th Circuit determined that it had little choice but to affirm the district court’s decision finding for Price Waterhouse and the plan administrator.

[tag]pension protection act, ppa, AIDS, disability, Price Waterhouse, Unum, 7th Circuit, ERISA[/tag]

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]

At issue in this case were the Termination Premiums which Oneida disputed it owed to the PBGC for terminating its defined benefit plan while in Chapter 11 bankruptcy. Oneida contended that the Termination Premium was an unsecured, pre-petition bankruptcy claim under Section 101(5) of the Bankruptcy Code. As such, Oneida would be able to evade paying the Termination Premium to the PBGC since Oneida was seeking reorganization in bankruptcy. At stake for Oneida was a Termination Premium equal to $1,250 multiplied by the number of individuals who were participants in the plan immediately before the termination date. When Oneida terminated the plan in 2006, there were 1,846 participants in the plan according to the final Form 5500 filed with the IRS, making the Termination Premium a tidy sum that Oneida would be obligated to pay to the PBGC.

The 2nd Circuit determined that, in the case of termination due to reorganization, the employer’s obligation to pay a Termination Premium on a pension plan that is terminated during the course of the bankruptcy does not even arise until the bankruptcy itself is terminated. As such, the PBGC’s right to a Termination Premium does not apply to such plan until the date of the discharge or dismissal of the employer. Thus, Oneida’s Termination Premium was not a pre-petition claim which could be discharged in bankruptcy.

[tag]pension protection act, ppa, PBGC, termination premium, bankruptcy, 2nd Circuit, Oneida, ERISA[/tag]

This is because: (1) one of the major components of defined contribution and defined benefits plans is compensation; (2) one of the major components of defined benefit and cash balance plan litigation is the Age Discrimination in Employment Act of 1967 (ADEA); and (3) the Lilly Ledbetter Act amended Section 7(d) of the Age Discrimination in Employment Act of 1967 (29 U.S.C. 626(d)) by adding Section 7(d)(3), which states:

“(3) For purposes of this section, an unlawful practice occurs, with respect to discrimination in compensation in violation of this Act, when a discriminatory compensation decision or other practice is adopted, when a person becomes subject to a discriminatory compensation decision or other practice, or when a person is affected by application of a discriminatory compensation decision or other practice, including each time wages, benefits, or other compensation is paid, resulting in whole or in part from such a decision or other practice.”

On February 6, 2009, eight days after Ledbetter became law, Wayne Tomlinson, the plan participant who brought a lawsuit against El Paso and the El Paso Pension Plan over the conversion of the El Paso Pension plan from a defined benefit plan to a cash balance plan, filed a motion to alter or amend the court’s decision granting summary judgment to El Paso and the El Paso Pension Plan. Specifically, Mr. Tomlinson is asking the court to alter or amend its decision of January 21, 2009, which held that his charge of age discrimination was untimely based on the U.S. Supreme Court’s decision in Ledbetter v. Goodyear Tire & Rubber Co., 550 U.S. 618 (2007). Since the Lilly Ledbetter Act was designed to rectify that Supreme Court decision, Mr. Tomlinson is asking the U.S. District Court for the District of Colorado to reconsider the decision in his case.

Charlie Sullivan, a professor at Seton Hall Law School, has written a good analysis of whether Ledbetter is retrospective or prospective. (hat tip to Prof. Richard Bales of the Workplace Prof Blog)
[tag]pension protection act, ppa, Lilly Ledbetter, El Paso, Tomlinson, cash balance, ADEA, ERISA[/tag]

“ERISA provides no exception to the plan administrator’s duty to act in accordance with plan documents.”

- Headnote 2, Kennedy v. Plan Administrators for Dupont Savings.

In the game of QDRO beneficiary tug-of-war between an ex-wife and daughter over a deceased participant’s account balance, the U.S. Supreme Court today found in favor of the ex-wife in Kennedy v. Plan Administrators for Dupont Savings, No. 07-636, (Jan. 26, 2009).

In an opinion that will have divorce attorneys and anyone with an ex-spouse double checking their beneficiary forms tomorrow, the Court decided that Mrs. Kennedy was entitled to Mr. Kennedy’s pension because Mr. Kennedy did not change his beneficiary form even though the ex-Mrs. Kennedy had waived her rights to Mr. Kennedy’s pension when they divorced. As summarized by Justice Souter, who authored the Court’s opinion:

“The question here is whether the terms of the limitation on assignment or alienation invalidated the act of a divorced spouse, the designated beneficiary under her ex-husband’s ERISA pension plan, who purported to waive her entitlement by a federal common law waiver embodied in a divorce decree that was not a QDRO. We hold that such a waiver is not rendered invalid by the text of the antialienation provision, but that the plan administrator properly disregarded the waiver owing to its conflict with the designation made by the former husband in accordance with plan documents”.

The assignment or alienation provision the Court refers to is contained in 29 U.S.C. 1056(d)(1) and Code section 401(a)(13)(A), which provides that benefits under a plan may not be assigned or alienated. 29 U.S.C. 1056(d)(3) and Code section 401(a)(13)(B) permits an exception to this rule for Qualified Domestic Relations Orders (QDRO). Code section 414(p) defines what a QDRO is.

What brought this case to the Court was the combination of love, divorce, lack of a QDRO and and old beneficiary designation form. In 1971, Mr. Kennedy marrried Mrs. Kennedy. Approximately 3 years later, in 1974, he signed a form designating Mrs. Kennedy as his beneficiary for the purposes of his employer’s plan – the DuPont Savings and Investment Plan. 20 years later, they divorced, and the divorce decree divested Mrs. Kennedy of all claims to any of Mr. Kennedy’s benefits under his employer’s retirement or pension plans. Mr. Kennedy then signed a new beneficiary designation form for DuPont’s other retirement plan – the DuPont Pension and Retirement Plan – designating his daughter as his beneficiary but did not sign a new beneficiary designation form for the DuPont Savings and Investment Plan. When Mr. Kennedy died in 2001, the only beneficiary designation for the DuPont Savings and Investment Plan was the beneficiary designation form signed in 1974 naming the now-former Mrs. Kennedy as his beneficiary.

The plan document provided that, “if at the time the participant dies, no surviving spouse exists and no beneficiary designation is in effect, distribution shall be made to, or in accordance with the directions of, the executor or administrator of the decedent’s estate.” When Mr. Kennedy died, his daughter became the executor of his estate, and made a claim for his account balance in the DuPont Savings and Investment Plan. The former Mrs. Kennedy also made a claim for his account balance in the DuPont Savings and Investment Plan pursuant to the 1974 beneficiary designation form. DuPont paid the account balance to the former Mrs. Kennedy pursuant to the beneficiary designation form, and the daughter sued DuPont and the plan’s administrator. The district court granted summary judgment to the daughter on behalf of the estate, and ordered DuPont and the plan’s administrator to pay Mr. Kennedy’s benefits under the plan to the estate. The 5th Circuit Court of Appeals reversed, and found that the account balance should go to the former Mrs. Kennedy as the divorce decree did not rise to the level of a QDRO.

The Supreme Court affirmed the 5th Circuit but states that the opinion’s rationale is different than the 5th Circuit’s reasoning. The Court states that under the terms of DuPont’s Savings and Investment Plan, the former Mrs. Kennedy was Mr. Kennedy’s designated beneficiary. The plan provided an easy way for Mr. Kennedy to change the designation but he did not. The plan provided a way for the former Mrs. Kennedy to disclaim her interest in Mr. Kennedy’s benefits via a valid QDRO, but she did not. The plan administrator therefore did what 29 U.S.C. 1104(a)(1)(D) required and paid Mr. Kennedy’s benefits under the plan to the former Mrs. Kennedy.

[tag]pension protection act, ppa, Supreme Court, Kennedy, 1104(a), 1056(d), 414(p), 401(a)(13), DuPont, QDRO, beneficiary, ERISA[/tag]

- Judge Clifton, 9th Circuit Court of Appeals

Yesterday, the 9th Circuit Court of Appeals decided whether or not a participant in a plan with a Qualified Joint and Survivor Annuity (QJSA) may change the surviving spouse beneficiary after the participant has retired and the annuity has become payable. In Caruso v. Caruso, No. 06-15938 (CA9 Sept. 17, 2008), the Court held that the “QJSA surviving spouse benefits irrevocably vest in the participant’s spouse at the time of the annuity start date – in this case the participant’s retirement – and may not be reassigned to a subsequent spouse.”

How the 9th Circuit reached this holding provides a cautionary tale for both spouses and plan administrators. In 1992, Mr. Caruso retired and began collecting pension benefits from two different pension plans – one sponsored by Hilton and one sponsored by IATSE. At the time of the annuity starting date, Mr. Caruso was married to his 8th wife, Janis Caruso. In 1994, Mr. Caruso and 8th wife decide to divorce, and before the entry of the formal divorce decreee, Mr. Caruso ask to remove 8th wife as his named survivor beneficiary. Both plan administrators refused to remove her as beneficiary since the designation became irrevocable at the time of his retirement and annuity starting date.

In 1997, their divorce became final. Mr. Caruso was awarded his interests in both pensions as his sole and separate property, and 8th wife was awarded her interests in her pensions as her soel and separate property. Additionally, Mr. Caruso was ordered to pay 8th wife $1,500 as an equalization payment because his pensions had greater value than her pensions.

Mr. Caruso then married his 9th wife, Judy Caruso, in 1997 and petitioned the domestic relations court for QDROs which would change his beneficiary designation from 8th wife to 9th wife. In 1999, Mr. Caruso died. The day after he died, the domestic relations court ordered the plan administrators to change the beneficiary from 8th wife to 9th wife.

8th wife then begins a long journey through both state and federal courts seeking to overturn this order, including a trip through the Nevada Supreme Court and a petition to the U.S. Supreme Court seeking certiorari, which the U.S. Supreme Court denied. In 2004, the domestic relations court issued two Qualified Domestic Relations Orders (QDROs), directing each plan to pay survivor benefits to 9th wife or pay the benefits into a constructive trust.

Normally, the case would have been expected to end at this point because 8th wife had exhausted all judicial avenues by pursuing her cause through both state and federal courts, and exhausted all of her appeals. Unfortunately for 9th wife, 8th wife files one final action in federal court, seeking to “enjoi any act or practice which violates any provision [of ERISA] or the terms of the plan”, and the plan trustees for the IATSE pension plan file a cross-claim against 8th wife. The 9th Circuit determines that the 8th wife may have exhausted all of her legal avenues, but the trustees for the IATSE plan have not exhausted their legal avenues because it was not a party to the prior suits and not in privity with the 8th wife. By filing the cross-claim, the trustees of the IATSE plan breathed new life into 8th wife’s journey through the legal system to obtain benefits payable under both plans.

The 9th Circuit then found that because Mr. Caruso’s retirement created a vested interest in the surviving spouse’s benefits, a domestic relations order issued after Mr. Caruso’s retirement could not alter or assign the 8th wife’s interest to the 9th wife, and that the Nevada domestic relations court’s attempt to transfer those benefits from 8th wife to 9th wife was prohibited.

In Evans v. Akers, No. 07-1140 (CA1, July 18, 2008), the Court of Appeals for the 1st Circuit applied the U.S. Supreme Court’s recent holding in LaRue when it addressed whether former employees who have received lump-sum distributions of the entire balance of their employer’s defined contribution plan are still participants under ERISA who may sue on behalf of the plan. The 1st Circuit found that they are, and held that former employees who allege that fiduciary breaches reduced their lump-sum distribution from a defined contribution plan have standing to sue as “participants” under the ERISA statute.

The former employees who received lump sum distributions in this case were former employees of W.R. Grace & Co. who participated in the W.R. Grace & Co. Savings and Investment Plan. One of the investment options offered by the plan was the Grace Common Stock Fund, a fund invested primarily in W.R. Grace & Co. stock. All employer contributions made to the plan were automatically invested in the Grace Common Stock Fund, and participants were not permitted to move those contributions out of W.R. Grace stock until they reached age 50.

On January 1, 2001, the plan stopped investing employer contributions in the Grace Common Stock Fund due to mounting financial pressure on the company and began allocating them according to participants’ investment elections. The plan also began permitting participants to move past matching contributions out of the Grace Common Stock Fund and into other investmentsbut did not advise or require participants to do so. The Grace Common Stock Fund was available to participants as an investment option until April 2, 2001, when W.R. Grace and its subsidiaries filed for bankruptcy.

Timothy Whipps terminated his employment with W.R. Grace on April 27, 2001. Keri Evans terminated his employment with W.R. Grace on August 30, 2002.

On April 17, 2003, the Grace Common Stock Fund stopped accepting new contributions but did not transfer past contributions to other investments unless a participant expressly changed their investment options. On February 27, 2004, plan fiduciaries announced their conclusion that investment in Grace stock was “clearly imprudent” and the Fund’s investment manager embarked on a program to sell the Grace stock and dissolve the fund. The Grace Common Stock Fund ceased to exist on April 19, 2004.

Two lawsuits were brought against W.R.Grace – one by Keri Evans and one by Timothy Whipps. On December 6, 2006, the district court denied the motions for class certification filed in both lawsuits. The district court also dismissed the lawsuit brought by Keri Evans, finding that both Whipps and Evans lacked standing because they failed to meet the statutory definition of “participant”, and as a result, the district court lacked subject matter jurisdiction over the lawsuit.

The 1st Circuit reversed, vacating the district court’s order dismissing the Evans action and remanded the case for further proceedings. In rendering that decision, the Court discusses the difference between awards for shareholder derivative lawsuits and awards due to breaches of the fiduciaries’ duty to act in the interest of the participants under ERISA. The court stated:

“Unlike shareholder derivative suits, where recovery for a fiduciary breach goes into the coffers of the corporation and is not generally paid out to the shareholders, recover made on behalf of a defined contribution plan must be allocated to the individual accounts injured by the breach. See Graden, 496 F.3d at 296 n.6. Although there may be certain circumstances where the transaction costs of allocating additional benefits to individual plan accounts or to those who ahve cashed out of the plan would exceed the amount of the recovery itself, we have no reason to think that such circumstances would be present in this case. Instead, if the plaintiffs are ultimately successful in this suit, the fiduciaries should, in accordance with their statutory duty of care, strive to allocate any recovery to the affected participants in relation to the impact the fiduciary breaches had on their particular accounts. Thus, the plaintiff’s allegation of fduciary mismanagement, which at this stage in the proceedings we assume to be true, identifies a concrete injury that is redressable by a court and falls within the scope of Article III standing.”

[tag]pension protection act, ppa, 1st Circuit, Evans, Akers, W.R. Grace, Grace Common Stock Fund, LaRue, ERISA[/tag]

As the largest block of shareholders, the participants in U.S. Sugar’s ESOP will be the largest group of individuals affected by this purchase. Florida’s announced goal with this purchase is to gain control of the U.S. Sugar acreage to aid its plans to resurrect the Everglades. I originally wrote about the US Sugar ESOP litigation here.

More Information:

Booting US Sugar from the Everglades, Michael Gunwald, Time.com and Yahoo News;
US Sugar Class Action Lawsuit website, law firm of Colson Hicks Eidson.

[tags]Pension Protection Act, ppa, US Sugar, ESOP, Florida, ERISA[/tags]

Often the entity that administers the plan, such as an employer or an insurance company, both determines whether an employee is eligible for benefits and pays benefits out of its own pocket. We here decide that this dual role creates a conflict of interest; that a reviewing court should consider that conflict as a factor in determining whether the plan administrator has abused its discretion in denying benefits; and that the significance of the factor will depend upon the circumstances of the particular case.

- Justice Breyer, majority opinion

In today’s decision in Metropolitan Life Insurance Co. v. Glenn, No. 06-923, the Supreme Court extends the four principles from Firestone Tire & Rubber Co. B. Bruch, 489 U.S. 101, in determining whether a conflict of interest materially affected MetLife’s decision to ultimately deny Glenn long term disability benefits. Firestone involved an employer who administered an ERISA benefits plan as well as evaluating claims for benefits and paying those benefits. MetLife has the Court evaluating a conflict of interest one step removed from the employer, where the plan administrator is not the employer but a professional insurance company who is evaluating claims for benefits as well as paying those benefits under a contractual relationship with the employer.

Glenn was a participant in her employer’s disability plan. She was diagnosed with a heart condition called severe dilated cardiomyopathy, and applied for disability benefits under the plan. MetLife approved her benefits for the initial 24 month period under the plan language which provided that she qualified for benefits under the terms of the plan if she could not perform the material duties of her own job. MetLife then referred her to a law firm who assisted her in applying for, and receiving, federal Social Security benefits. Under the terms of the plan, MetLife was entitled to reimbursement of benefits paid from her Social Security benefits, so when she was approved for retroactive Social Security benefits, her entire retroactive amount was paid to MetLife and the attorneys MetLife referred her to with Glenn receiving none of that award. The decision of the Administrative Law Judge, in approving the Social Security benefits, found that Glenn could not perform her own job and also was unable to perform any jobs for which she could qualify.

To continue receiving benefits, the plan required that after the initial 24 month period, Glenn had to meet a stricter standard of being incapable of performing not only her own job but also incapable of performing the material duties of any gainful occupation for which she was reasonably qualified. Despite medical reports to the contrary, and also contrary to the finding of the Administrative Law Judge which MetLife had materially benefited from, MetLife denied Glenn benefits for this extended period, finding that she was capable of performing full time sedentary work.

Glenn sought restoration of her benefits, first through administrative review and then by bringing a lawsuit against MetLife in federal district court. The federal district court ruled in favor of MetLife. Glenn appealed to the Sixth Circuit Court of Appeals, which found MetLife’s conflict of interest in this case troubling, and who reversed the decision of the district court and remanded the case back to the district court. MetLife then appealed to the U.S. Supreme Court.

The Supreme Court found nothing improper in the way in which the 6th Circuit conducted its review, and affirmed the 6th Circuit’s decision in this case. In making that determination, the Court discussed all four principles from Firestone. The majority opinion, written by Justice Breyer and joined by Justices Stevens, Souter, Ginsburg and Alito, is clearly troubled by MetLife’s conduct in this case, and in the potential financial motivation MetLife may have had in its’ decision to deny Glenn’s benefits. I wonder if the difficulty in completing a sentence at oral argument has come back to haunt MetLife with this opinion. Or it might be that MetLife’s behavior toward Glenn spoke louder than words to the Court when it came to deciding this case.

I’ve been working on a book about plan documents and divorce. This decision may not look that significant, but I think this decision will be viewed in hindsight as cutting the gordian knot if it results in divorcing the act of administering plans and evaluating claims for benefits from the act of paying those benefits, not that such a change is needed except in Glenn-type situations.

Additional information:

A New Firestone Drill: MetLife v. Glen, Andrew L. Oringer, BNA’s Pension & Benefits Blog;

Holding Pat and Satisfying No One: The Glenn ERISA Conflict of Interest Decision, Paul M. Secunda, Workplace Prof Blog;

MetLife Decision Handed Down – Supreme Court Affirms the Sixth Circuit, Roy F. Harmon III, Health Plan Law;

MetLife v. Glenn Decided!, Brian S. King, Brian King’s ERISA Blog;

The Supreme Court’s Ruling in MetLife v. Glen, Stephen Rosenberg, Boston ERISA & Insurance Litigation Blog – yes, Stephen, I do wish the Supreme Court would have asked before releasing this opinion today. Where were they last week when nothing happened in Planland so I spent the week proofreading my Cycle C ESOP/KSOP plan document and working on my DBK plan document. Today, I was finally able to confirm that the President signed the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART) Act (affects the definition of comp in plans); the IRS released more cash balance-related regulations, the Court also released the opinion in Kentucky Retirement Systems v. EEOC; and my teenage daughter is holding a sleepover tonight.

[tags]Pension Protection Act, ppa, MetLife, Glenn, Firestone, Paul Secunda, Stephen Rosenberg, Supreme Court, 6th Circuit, conflict of interest, ERISA[/tags]