Chapter VII: fiduciary liability issues.
Fiduciaries may be held personally liable only for breaches that occurred during their tenure as a fiduciary. ERISA states that "[n]o fiduciary shall be liable with respect to a breach of fiduciary duty under this title if such breach was committed before he became a fiduciary or after he ceased to be a fiduciary." (1)
Anytime a plan fiduciary is found to have violated his fiduciary duties to a plan under the provisions of ERISA (see Chapter IV for a discussion of fiduciary duties), the Department of Labor, participants, beneficiaries, and certain former participants (see discussion of The Pension Annuitants Protection Act of 1994, below) may seek to enforce personal liability against the offending fiduciary for damages caused as a result of the breach.
A person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries will be personally liable to make good to such plan any losses resulting from each breach. A breaching fiduciary also must "restore to such plan any profits" that have been earned through the use of plan assets. (2)
In addition, a fiduciary who breaches a fiduciary duty "shall be subject to such other equitable or remedial relief as the court may deem appropriate, including removal of such fiduciary." (3) The Secretary of Labor, participants, or beneficiaries may bring a civil action under ERISA Section 502(a)(2) "for appropriate relief" under ERISA Section 409.
Further, civil penalties may be imposed against a fiduciary who has breached his fiduciary duty whenever the plan he holds fiduciary status with recovers an amount through a settlement agreement or judicial proceeding as a result of the breach. (See Q 496 for more detail on the application of civil penalties.) (4) However, the Ninth Circuit has ruled that a liability for breach of fiduciary duty under ERISA is dischargeable in bankruptcy if it does not involve the misappropriation of funds or failure to provide a proper accounting of funds. (5)
A federal Court for the Northern District of Georgia has ruled that a DOL claim seeking to impose personal liability on a fiduciary pursuant to ERISA Sections 409 and 502(a)(2) granted that fiduciary a right to a jury trial. The court held that ERISA Section 502(a)(2) does not limit available remedies under ERISA to equities, and it expressly authorizes remedies that are compensatory in nature, which arise at law. Legal remedies, as opposed to equitable remedies, grant a defendant the right to a jury trial. (6)
The Pension Annuitants Protection Act of 1994 (P.L. 103-401) allows former participants and beneficiaries to seek "appropriate relief" from the fiduciaries of their former plan who violated their fiduciary duty in regard to the purchase of annuities that terminated the participants' and beneficiaries' active status under the plan (i.e., the termination removed them from the protections afforded active participants and beneficiaries under ERISA). Although the term "appropriate relief" is not defined, the statute does state that appropriate relief includes "the posting of security if necessary, to assure receipt by the participant or beneficiary of the amounts provided by such ... annuity, plus reasonable prejudgment interest on such amounts." (1) This statute was a direct response to the failures of life insurance companies that sold lesser rated annuities to large pension plans for the benefit of terminated and retired participants (thereby removing them from active status under their plan), and then went bankrupt, leaving the annuities worthless and the annuitants without recourse to plan fiduciaries under ERISA. (2)
The Supreme Court has held that ERISA Section 409(a) was designed to protect the entire plan. Consequently, ERISA's authorization of other appropriate relief (equitable or remedial) does not provide relief other than for the plan itself. In other words, disgorgement of profits and recoveries are not forms of relief available to individual participants or beneficiaries. (3) The Second Circuit has ruled that the Supreme Court holding in the LaRue case does not extend beyond individual account plans. (4)
In distinguishing the Massachusetts Mutual Life Insurance Co. v Russell case, the Supreme Court has held that, for defined contribution plans, fiduciary misconduct of the type envisioned by ERISA Section 409 "need not threaten" the entire plan's solvency in order for the case to be actionable under ERISA Section 502(a)(2). In other words, a violation of ERISA Section 409 which reduces an individual account in a defined contribution plan and an action to have such loss recovered against the offending fiduciary may proceed. In this case, a 401(k) participant sought recovery of $150,000 in assets to his account that he claimed were "depleted" by the plan administrator's failure to follow his investment instructions. (5)
In a different case, the Supreme Court held that participants and beneficiaries may seek individual equitable relief for a breach of fiduciary duty under ERISA Section 502(a)(3), which authorizes appropriate equitable relief to "redress such violations or ... to enforce any provisions of this title or the terms of the plan." In its ruling, the Court rejected the claim that ERISA Section 409 provides the exclusive remedy for a breach of fiduciary duty. The Court determined ERISA Section 502(a)(3) to be a "catch all" provision that was consistent with ERISA's purpose of protecting the best interests of participants and beneficiaries. The holding authorized relief under ERISA Section 502(a)(3) only where appropriate equitable relief was not otherwise available. (6)
The federal court for the Eastern District of Virginia has held that plan forfeitures cannot be used to offset the personal liability of fiduciaries found liable for their fiduciary breach. (7)
495. What are successor fiduciary responsibilities in regard to an actual or potential breach of fiduciary duty committed by a former fiduciary?
A successor fiduciary is obligated to take "reasonable steps" to remedy an outstanding breach committed by a predecessor fiduciary if he discovers sufficient information to determine that the actions of the prior fiduciary resulted in the outstanding breach. A failure to take remedial action constitutes a separate, current breach of fiduciary duty by the successor fiduciary. (1)
A successor fiduciary also has a duty to notify plan trustees or the Department of Labor if he has developed enough information to believe that a breach of fiduciary duty by a former fiduciary may have taken place. (2)
496. What are ERISA Section 502(l) penalties and how are they applied?
ERISA provides for a mandatory civil penalty against a fiduciary who breaches a fiduciary responsibility or commits a violation of ERISA. Civil penalties are also imposed upon other persons who knowingly participate in such a breach or violation. The civil penalty is equal to 20% of the "applicable recovery amount" paid pursuant to a settlement agreement with the Department of Labor (DOL) or a court ordered payment to a plan, participant, or beneficiary in a judicial proceeding instituted by the DOL. (3)
The DOL Regional Directors have been delegated authority in their respective geographic jurisdictions for assessing these civil penalties. This includes the authority to waive or reduce the penalty based upon a determination that the subject would be unable to restore all losses to the plan, participant, or beneficiary of the plan without incurring "severe financial hardship. "The DOL Director of the Office of Exemption Determinations is delegated the authority to waive or reduce the civil penalties based upon a determination that an individual acted reasonably and in good faith in engaging in the fiduciary breach. (4)
The amount of the civil penalty is reduced by the amount of any penalty or tax imposed on the fiduciary or other person with respect to the transaction under ERISA Section 406 and ERISA Section 502(i) (5% of any amount involved in an ERISA Section 406 prohibited transaction; see Q 417), or IRC Section 4975. (5)
497. What is the applicable recovery amount under ERISA Section 502(l)?
The term "applicable recovery amount" is defined as any amount that is recovered by an employee benefit plan, a participant or beneficiary of a plan or a legal representative of a plan, or from a fiduciary or other person who knowingly participated in a breach of fiduciary duty or violation of the rules regarding fiduciary responsibility. The amount may be recovered pursuant to a settlement agreement with the Department of Labor (DOL) or a court order resulting from a judicial proceeding instituted by the DOL. (1) The applicable recovery amount with regard to a continuing violation is the total amount recovered pursuant to a settlement agreement or court order, reduced by the amount attributable to any element of the violation that occurred prior to December 19, 1989. (2)
498. What is a settlement agreement and court order?
A "settlement agreement" is an agreement between the Department of Labor (DOL) and a person whom the DOL alleges has committed a breach of fiduciary duty or violation of the rules regarding fiduciary responsibility. The agreement is pursuant to a claim for the breach or violation that is released in return for cash or other property being tendered to a plan, a participant, or beneficiary of a plan, or the legal representative of a plan or participants and beneficiaries. (3)
A "court order" is a judicial decree that either awards monetary damages or provides equitable relief. (4)
According to the Employee Benefits Security Administration (EBSA), in the absence of a signed agreement, but where corrective actions are taken by the recipient of a Voluntary Correction (VC) notice letter, the circumstances dictate whether a settlement agreement has been effected. A settlement agreement is deemed to occur in situations where the recipient of a VC notice letter, in response to that letter, corrects the described violations. (5)
499. How is the ERISA Section 502(l) penalty assessed?
The ERISA Section 502(l) penalty is assessed subsequent to the payment of the applicable recovery amount in accordance with a settlement agreement or court order. The civil penalty may be assessed against only the person who is required by the terms of the judgment or the settlement agreement to pay the applicable recovery amount, and can be assessed only for breaches or violations of ERISA that occurred on or after December 19, 1989. (6) With regard to a continuing violation, the 20% penalty may be assessed upon only that portion of the recovery that is attributable to violations occurring on or after December 19, 1989. The EBSA offers this example: if only one of a group of fiduciaries agrees to restore losses to a plan pursuant to a settlement agreement, the civil penalty may be assessed against only that fiduciary. In certain circumstances, the penalty may be assessed against fiduciaries or knowing participants where the restitution to the plan is made on their behalf by a third party. Specifically, the penalty may be assessed when the third party has no independent obligation under ERISA to correct the violations. (7)
The regional office of the EBSA serves on the person liable for making the payment a notice of assessment (Notice) of a civil penalty equal to 20% of the applicable recovery amount. (1) The Notice sent by the regional office is a document that contains a specified assessment, in monetary terms, of the civil penalty. The Notice contains a brief factual description of the violation for which the assessment is being made, the identity of the person being assessed, the amount of the assessment, and the basis for assessing that particular person that particular penalty amount. (2)
The service of the Notice is made by delivering a copy to the person being assessed, by leaving a copy at the principal office, place of business, or residence of such person, or by mailing a copy to the last known address of the person. Service by certified mail is completed upon mailing the notice; service by regular mail is completed upon receipt by the addressee. (3)
500. How is the ERISA Section 502(l) penalty calculated?
The penalty under ERISA Section 502(l) is equal to 20% of the "applicable recovery amount" paid pursuant to a settlement agreement with the Department of Labor (DOL) or a court order in a judicial proceeding instituted by the DOL under ERISA Section 502(a)(2) or ERISA Section 502(a)(5). The penalty is calculated as a percentage of the amount paid to a plan, participant, or beneficiary that represents losses incurred by the plan, disgorged profits, and amounts necessary to achieve correction of the ERISA violation. If correction is achieved without actual payment to a plan, participant, or beneficiary, no penalty may be assessed. An example of such an action is a fiduciary taking administrative action to prevent future violations. (4)
501. What is the time period to pay the ERISA Section 502(l) penalty?
A person liable for the ERISA Section 502(l) penalty has 60 days from the service of the notice of assessment to pay the assessed amount. Subject to any tolling of the 60-day payment period during the consideration of a waiver or reduction petition (see Q 502), the notice of assessment becomes a final agency action (meaning it is reviewable by a court) (5) on the first day following the 60-day period. At any time prior to the expiration of that 60-day period, a person may request one conference, per assessment, with the Department of Labor (DOL) to discuss the calculation of the assessment. If a conference is requested, the DOL will schedule one as soon as administratively feasible. The 60-day payment period will not, however, be tolled upon such request. (6)
502. May the ERISA Section 502(l) penalty be reduced or waived?
At any time prior to the expiration of the 60-day payment period, a person may petition the Department of Labor (DOL) to waive or reduce the assessed penalty on one of two grounds: (1) that the person acted reasonably and in good faith in engaging in the breach or violation; or (2) the person will not be able to restore all losses to the plan, participants, or beneficiaries of the plan without severe financial hardship unless the waiver or reduction is granted. (7) The petition for waiver or reduction of the penalty is submitted to the Regional Director who issued the notice of assessment of the penalty. (1)
As to whether a person acted reasonably and in good faith, the DOL examines the decision-making process with respect to the transaction in question to determine whether it was designed to adequately safeguard the interests of the participants and beneficiaries of the plan.
A person may request a financial hardship waiver not only with regard to actual losses to the plan, but also with regard to any disgorgement of profits gained through the relevant breach or violation, or amounts necessary for transfer to the plan in order to correct the relevant breach or violation. (2)
If the petition is based wholly on financial hardship, a written determination of whether to reduce or waive the penalty is made by the regional director within 60 days of receipt of the petition. If the petition is based in part on financial hardship and in part on good faith, the regional director makes a written determination of whether to reduce or waive the penalty only on the basis of financial hardship within 60 days of receipt. If the petitioner remains liable for any portion of the penalty after the regional director's written determination, the regional director forwards the petition to the Employee Benefits Security Administration's (EBSA) Office of Exemption Determinations for a determination of whether to reduce or waive the remaining portion of the penalty based on good faith. If the petition is based in whole on good faith, the regional director forwards the petition to the EBSA's Office of Exemption Determinations for a determination of whether to reduce or waive the penalty. (3)
If the petition for waiver or reduction of penalty is submitted during the 60-day payment period, the payment period for the penalty in question will be tolled pending the DOL's consideration of the petition. During the consideration, the petitioner is also entitled to one conference with the DOL. The DOL may, however, in its sole discretion, schedule or hold additional conferences with the petitioner concerning the actual allegations contained in the petition. (4)
Once the DOL has made a decision with regard to the petition, the petitioner will be served a written determination briefly informing him of the DOL's decision and the grounds for that decision. The determination is solely within the DOL's discretion and is a final, non-reviewable order. In the event that the DOL concludes that no waiver or reduction is granted, the payment period for the penalty in question, if previously tolled, will resume as of the date of service of the written determination on the petitioner. (5)
503. What are the required contents of a petition for a waiver of the ERISA Section 502(l) penalty?
A petition to waive or reduce the ERISA Section 502(l) civil penalty must be in writing and contain the following information: (1) the name of the petitioner; (2) a detailed description of the fiduciary duty, breach, or violation that is the subject of the penalty; (3) a detailed recitation of the facts that support the bases for waiver or reduction (see Q 502), accompanied by underlying documentation supporting such factual allegations; and (4) a declaration, signed and dated by the petitioner, which states, under penalty of perjury, that the petitioner is making true and correct representations to the best of his knowledge and belief. (1)
504. May the ERISA Section 502(l) penalty be offset by other penalties?
Yes. The ERISA Section 502(l) civil penalty assessed on a fiduciary or other person with respect to a transaction is reduced by the amount of a penalty or tax imposed on the fiduciary or other person with respect to ERISA Section 502(i) or Internal Revenue Code Section 4975. (2) ERISA Section 502(i) provides for a civil penalty against a party in interest who engages in a prohibited transaction with respect to an employee benefit plan. See Q 417. IRC Section 4975 provides for an excise tax against a disqualified person who engages in a prohibited transaction with a plan. See Q 412.
In order to reduce the ERISA Section 502(l) penalty, a person must provide proof to the Department of Labor that an offsetting penalty was paid. The entire IRC Section 4975 excise tax or ERISA Section 502(i) penalty may offset an ERISA Section 502(l) civil penalty imposed due to the same transaction. The offset is limited to the identical parties on whom the excise tax or penalty is imposed. Any interest accrued on an ERISA Section 502(i) penalty or IRC Section 4975 excise tax assessment is not allowed as an offset to the ERISA Section 502(l) penalty. (3)
505. Must the Department of Labor prove a breach of fiduciary duty to assess the ERISA Section 502(l) penalty?
Yes. Absent a court order, in order to assess the penalty the Department of Labor (DOL) must prove a breach of fiduciary duty rather than unilaterally determine that a breach occurred because the statute does not contemplate punishment where no violation has occurred. ERISA Section 502(l) provides, in pertinent part, that in the case of any breach of fiduciary responsibility by a fiduciary, the DOL must assess a civil penalty against the fiduciary in an amount equal to 20% of the "applicable recovery amount" (any amount recovered from a fiduciary in accordance with a settlement agreement or court order). (4)
The DOL has contended that it is not required to prove a breach to assess the penalty when it has secured a settlement agreement, even if, in that settlement agreement, the party does not admit it breached a fiduciary duty. The DOL has argued that the words "in the case of any breach" are merely an instruction as to when to assess the penalty, and not an element of the penalty itself. The courts have rejected this argument because it would provide the DOL the unilateral determination of when a fiduciary breach has occurred and the "unchecked authority to impose a penalty" so long as there was a recovery through a settlement agreement. One court noted that a fiduciary may agree to a settlement to avoid an expensive legal battle even in the absence of a fiduciary breach. In such a case, under the DOL's proposed reading of the statute, a fiduciary would subject itself to the 20% penalty because of the enforceable settlement agreement. In rejecting the DOL's contention, the court noted that in seeking the imposition of the ERISA Section 502(l) penalty, a trial may not be necessary to prove a breach of fiduciary duty if the facts (already developed in the course of the settlement negotiations) could establish a breach of fiduciary duty as a matter of law, or alternatively, if the DOL settled the case and required a sentence in the consent decree admitting that a violation occurred. (1)
506. Is a settlement agreement required for the assessment of an ERISA Section 502(l) penalty?
Yes. According to one court, absent a court order the Department of Labor (DOL) may not impose an ERISA Section 502(l) penalty on fiduciaries who voluntarily correct a breach without entering into a settlement agreement. The DOL must assess a civil penalty against the fiduciary in an amount equal to 20% of the "applicable recovery amount" (any amount that is recovered from a fiduciary in accordance with a settlement agreement or court order). (2) According to the court, the applicable recovery amount does not include amounts that are recovered by a voluntary correction that are not recovered pursuant to a settlement agreement.
The essential elements of a settlement agreement are "a definitive offer and acceptance, consideration, and parties who have the capacity and authority to agree." As a contract, a settlement agreement is construed using ordinary principles of contract interpretation. In one case, a contract was not formed simply by an exchange of letters between the fiduciary and the DOL, including a voluntary correction letter issued by the DOL. Also, the fiduciary repeatedly used precatory language in the letters demonstrating that there was no definite offer upon which the parties could have a meeting of the minds, nor was there the presence of the essential elements of a contract. Because no contract or settlement agreement had been formed between the fiduciary and DOL, the district court held that there was no statutory basis on which to impose the ERISA Section 502(l) penalty. (3) See also Huffer v. Herman, (4) in which the U.S. District Court for the Southern District of Ohio noted that phrases such as "additional information may lead us to change our views" and "please advise ... what action you propose to take" made the DOL Voluntary Compliance Letter something less than an offer to constitute a "settlement agreement" under ERISA [section] 502(l).
507. What is the scope of protection offered under the ERISA prohibition against interference with participant rights?
ERISA Section 510 provides that "[i]t shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled" under the provisions of an employee benefit plan or ERISA.
The Supreme Court has held that ERISA Section 510 does not distinguish between rights that vest under ERISA and those that do not. Therefore, ERISA Section 510 prohibits the interference with the attainment of any right to which a participant may become entitled. Further, the Court held that a plan sponsor's power to amend or eliminate a welfare benefit plan does not include the power to discharge, fine, suspend, expel, discipline, or discriminate against the plan's participants and beneficiaries for the purpose of interfering with the attainment of rights under the plan. (1)
This would appear to be an extension of an earlier Supreme Court ruling that a plan sponsor's right to amend its plans exists in balance with participant rights under ERISA Section 510 and may only be exercised in accordance with the plan's formal amendment procedures. (2)
ERISA Section 5 10 protects existing employees and does not extend to any issues involving a claim of a discriminatory refusal to hire an individual. Further, ERISA provides plan sponsors considerable discretion in the design and administration of qualified plans that they sponsor. Part of this discretion is a right to offer varying degrees of benefits to participants under the plans they sponsor. Previously laid-off employees, who were not rehired in spite of an upsurge in business because of the negative financial impact they would have on their former employer's retirement plans, were held to have no standing under ERISA Section 510 as it does not apply to former employees. (3)
In further clarification of the employer's expansive right to design and subsequently amend a plan, the Sixth Circuit ruled in Coomer v. Bethesda Hospital, Inc. (4) that ERISA Section 510 does not limit an employer's ability to amend a plan for the benefit of one participant while refusing to amend the plan in the same manner to benefit other individuals. In distinguishing this right, the court pointed out that deciding what the terms of a plan will be is a settlor function. Administering the provisions of the plan, as written or amended, is a fiduciary function. Specifically, the Court states "to prevail under Section 510, a plaintiff must show that the alleged discrimination was designed either to retaliate for the exercise of a right or to interfere with the attainment of an entitled right." The court also cited two cases in support of this conclusion: McGath v. Auto-Body North Shore, (5) and Haberern v. Kaupp Vascular Surgeons Ltd. Defined Benefit Pension Plan, (6)
The Sixth Circuit expanded the coverage of ERISA Section 510 beyond the traditional plan sponsor or employer-employee relationship. The court held that ERISA Section 510 was primarily, but not exclusively, aimed at employment situations. The holding by the court is that a Section 510 claim may be brought against any person who discharges, fines, expels, disciplines, or discriminates against a participant or beneficiary for exercising any right to which they are entitled under an employee benefit plan or ERISA. The case involved the widow of a participant who had signed a prenuptial agreement that provided that if she survived her husband she would be entitled to remain in the marital residence and receive a weekly allowance of $300 from the decedent's estate. In return, she surrendered all other claims against his estate. The widow learned of the decedent's benefits under a plan to which she, as the surviving spouse, was entitled. The plan administrator paid the widow those benefits in a lump-sum. The decedent's estate determined that the widow's receipt of the lump-sum benefit from the plan was in violation of the prenuptial agreement and ceased the $300 weekly living stipend. The court held that, under ERISA Section 510, where a case does not involve an employment relationship, the list of proscribed actions should be read to mean adverse actions that affect the claimant's rights under the plan. The court held that the widow had met this threshold in that the estate had the power to interfere with her enjoyment of the survivor benefits under the plan by offsetting them against the weekly payments made available under the prenuptial agreement. Such alleged retaliation has a logical linkage to the widow's status as an ERISA beneficiary. (1)
The Ninth Circuit has expanded the coverage of ERISA Section 510 to include a whistleblower claim brought by a former participant because the claimant was an active participant at the time of the alleged violation of ERISA Section 510. The claimant was terminated from his employment with the plan sponsor three weeks after he, as a member of the ESOP committee, strongly urged that the DOL investigate the plan sponsor's proposed termination of the ESOP. The opinion of the Court states that "[t]o hold otherwise would allow an employer simply by wrongfully firing a whistleblowing employee and then terminating the plan, wrongfully or otherwise, to deprive that employee of the right to sue the employer for retaliation prohibited by ERISA." (2)
A group of former employees claimed that their employer violated ERISA Section 510 when it closed the plant where they worked and discharged them to prevent their retirement eligibility. When the plant closed, some of the employees were within only a year or two of qualifying for retirement benefits under the employer's defined benefit pension plan. The employer claimed that the plant was closed due to overcapacity (only ten percent of the plant's available space was being used). The trial court dismissed the employees' claims and they appealed. The Sixth Circuit affirmed. The court concluded that the employees simply did not have sufficient evidence of improper motive to take the claim to a jury. (The employees' claim was undercut by the fact that two employees were subsequently recalled to work at another plant and actually completed the service necessary to become retirement eligible.) (3)
The United States District Court for the Eastern District of Michigan has ruled that an employee's internal complaint of plan violations may be protected under ERISA Section 510. (4) After a participant complained to the plan sponsor about its failure to timely deposit payroll contributions into the company-sponsored plan, the plan sponsor deposited the contributions, along with matching contributions and lost earnings. Three months later, the participant was terminated. In response, the participant filed suit alleging the termination was retaliatory and a violation of ERISA Section 510.The plan sponsor moved for a dismissal claiming the complaint was not protected under ERISA Section 510 and that the intervening three months showed no causal link between the complaint and the termination. The Court denied the motion stating that the phrase under ERISA Section 510 "inquiry or proceeding" is broad enough to include an internal complaint. Further, the Court noted that the plan sponsor may have needed the three-month interval to train a replacement for the terminated participant. Finally, although the employer offered evidence of unrelated legitimate reasons for the termination, the Court ruled that there was sufficient evidence to believe these were pretextual in nature (citing prior positive performance ratings and a lack of opportunity for corrective counseling/guidance for the issue terminated--in violation of company policy). Section 623 of the Pension Protection Act of 2006 (1) amends ERISA Section 511 to provide that the penalty for any attempt to interfere with, or prevent the exercise of, participant rights under an employee benefit plan that involves "the use of fraud, force, violence or the threat of the use of fraud force or violence" is a criminal act to which the perpetrator may be fined up to $100,000 (up from the previous maximum of $10,000), imprisoned up to 10 years (up from the previous maximum of one year), or both.
508. Does ERISA restrict an employer's right to discharge an employee for cause?
No. Courts have held that an employee's discharge for cause is not interference with participant rights under ERISA Section 510. This includes discharge for breach of company policy, misconduct, and criminal activities. (2)
509. Who has the burden of proof with respect to establishing intentional interference with participant rights?
In order for a participant to establish a prima facie case of a violation of ERISA Section 510, the participant must show that the plan sponsor: (1) undertook prohibited action; (2) which was undertaken in an effort to interfere; (3) with the attainment of any right to which the participant may become entitled. Rush v. United Technologies Otis Elevator Div., (3) Hendricks v. Edgewater Steel Co., (4) Baker v. O'Reilly Automotive, Inc. (5)
The burden of proof requires the complainant to demonstrate specific intent on the part of the plan sponsor to interfere with the attainment of rights under the plan. If this is established, the plan sponsor must establish a nondiscriminatory purpose for the actions it undertook. If the plan sponsor can do this, the participant must be able to demonstrate that the stated reasons of the plan sponsor are pretextual.
The Tenth Circuit has ruled that employees terminated after their child had incurred large medical expenses could proceed with litigation filed under the Americans with Disabilities Act (ADA), which prohibits discrimination based upon association with a disabled person and prohibits intentional interference with ERISA rights, where the evidence supported a reasonable inference that their involuntary termination was motivated by the high costs to their employer of their son's treatment. (6)
The court pointed out concerns expressed by the employer about the son's health care costs stemming from the treatment for a recurrence of brain cancer and the close "temporal proximity" to the employees' termination (less than three weeks for the father and six weeks for the mother). The court also relied on evidence that the employer was aware of the costs for the treatment of the child and had included health care costs for each employee in its budget line item for labor costs. The court also noted the employer's failure to progressively discipline (rather than terminate) the employees for the alleged reasons resulting in termination. This created factual issues as to whether the employer's reason for termination was pretextual.
510. Are an employer's efforts to reduce costs by capping lifetime health benefits a violation of ERISA Section 510?
The Fifth Circuit has held that retroactive modifications to the lifetime benefits available under an employer's health plan do not violate the anti-discrimination provisions of ERISA Section 510. The plan sponsor placed a cap on the lifetime benefits under its health plan in an effort to reduce health care costs associated with AIDS treatment. The court decided that the plan sponsor's action in capping benefits was not discriminatory in that it affected all participants in the plan and not just those participants who were under treatment for AIDS. (1)
511. Do participants and beneficiaries have a right to seek civil enforcement of ERISA Section 510?
Yes. A participant, beneficiary, or fiduciary may bring a civil action to enjoin any act or practice that violates any provision of ERISA or the terms of the plan's governing documents, or to obtain other equitable relief to redress such violations and enforce any provision of ERISA (including ERISA Section 510). (2) Actions that may be brought by participants and beneficiaries include efforts to recover benefits due under the plan, enforce rights under the plan, or clarify rights to future benefits under the plan. Participants and beneficiaries may also bring suit against plan administrators for failure to comply with the notice requirements of ERISA.
Alleged violations of the fiduciary provisions of ERISA may be the subject of civil actions to enforce those provisions. Civil actions under these circumstances may be brought by the Department of Labor, participants, beneficiaries, and other plan fiduciaries.
In any civil action regarding causes of action under ERISA: (1) the party filing the action must have standing to sue; (2) the court to which the suit has been filed must have jurisdiction over the claim; and (3) the action must be brought in the proper venue.
The Third Circuit Court of Appeals has ruled that a former employee claiming that a fiduciary breach diminished his account value is a "participant" for purposes of determining his standing to sue. In overturning a trial court ruling that the plaintiff, as a former plan participant who had cashed out of the plan, had no standing to sue under ERISA, the Third Circuit advised that ERISA defines a participant as "any employee or former employee ... who is or may become eligible to receive a benefit of any type from an employee benefit plan." The court went on to cite the Supreme Court's ruling in Firestone Tire and Rubber Co. v. Bruch which held that the term "participant" covers a former employee with a colorable claim for "vested benefits." In granting the plaintiff standing to sue, the Third Circuit concluded that ERISA imposes fiduciary duties on plan administrators so that part of a participant's entitlement is the value of his account unencumbered by any fiduciary impropriety. "In other words," the court stated, "ERISA entitles individual account plan participants not only to what is in their accounts, but also to what should be there given the terms of the plan and ERISA's fiduciary obligations." (3)
The Seventh Circuit has ruled that former employees had standing to sue in an ERISA fiduciary breach action, even though before their amended complaint was filed they had received full payout of their defined contribution pension plan accounts. (1)
The Federal Court for the Western District of Michigan has ruled that a profit-sharing plan trustee was entitled to a jury trial on his ERISA claim that the plan's former stock brokerage firm breached its fiduciary duties by failing to discover that the plan's former trustee had taken illegal plan loans. (2)
512. Do participants and beneficiaries have a right to seek criminal enforcement of ERISA?
No. The criminal provisions of ERISA Section 511 (prohibiting the interference with participant rights through the use or threat of force or intimidation) may be brought before the courts only by the Department of Justice. (3)
This does not mean, however, that participants and beneficiaries who reasonably believe they have experienced an intentional interference with their rights under ERISA as a result of the use or threat of force or intimidation are without recourse. The aggrieved participants or beneficiaries have the right to present the evidence they have gathered, which led them to believe that a criminal violation of ERISA Section 511 occurred, to the Employee Benefits Security Administration (EBSA) field office that has jurisdiction for review and investigation. If the EBSA field office investigates the claims of criminal interference and establishes probable cause to believe that a participant or beneficiary has been the victim of criminal intimidation, the field office will present its findings to the appropriate U.S. Attorney's Office for consideration of prosecution. The U.S. Attorney's Office will review the results of the investigation, and if it agrees with the EBSA's findings, present the case to a grand jury to seek an indictment of the alleged perpetrators.
513. What remedies are available to participants, beneficiaries, and plans when a fiduciary duty is breached?
Federal courts have broad discretion to fashion appropriate relief on behalf of plans, participants, beneficiaries, other fiduciaries, and the Department of Labor to remedy a breach of fiduciary duty, including the return of any profits earned through the use of plan assets. ERISA also provides for the legal remedy of monetary damages for the restoration of plan losses. Courts may fashion whatever equitable or remedial relief they deem appropriate, including the removal of an individual from his position of fiduciary. (4)
ERISA Section 206(d)(4) permits the offset and alienation of benefits of fiduciaries who have been convicted or held liable for a criminal or civil judgment against the plan to which they serve as fiduciaries if the requirement to pay arises from:
1. A judgment of conviction for a crime involving the plan;
2. A civil judgment (or consent order or decree) that is entered by a court in an action brought in connection with a breach (or alleged breach) of fiduciary duty under ERISA; or
3. A settlement agreement entered into by the participant and either the Secretary of Labor or the Employee Benefits Security Administration (EBSA) in connection with a breach of fiduciary duty.
The court order, judgment, decree or settlement agreement must specifically require that all or a part of the amount to be paid to the plan be offset against the participant's plan benefits. According to the Conference Committee Report, such an offset is includable in the breaching fiduciary's income as of the date of the offset. (1)
The Eighth Circuit Court of Appeals has ruled that a 401(k) plan participant is not entitled to monetary damages from the plan sponsor for a three-and-one-half year delay he incurred in obtaining his 401(k) distribution. (2)
The Tenth Circuit Court of Appeals has ruled that a plaintiff's failure to exhaust remedies regarding a claim for disability benefits results in judgment in favor of the defendant plan. (3)
The U.S. District Court for the Northern District of Texas has held that the monetary relief sought by the plan sponsor to recover an excess distribution of $220,106.94 from the former plan participant was outside of the scope of equitable relief provided for under ERISA Section 502(a) (3). (4) While acknowledging that there is an exception for restitution in equity (in the form of a constructive trust or equitable lien), the court determined that because the former participant had spent the excess distribution, it would not apply in this case because the equitable restitution could no longer be traced to particular funds or property. The plan sponsor in this matter was however free to pursue a case of personal liability as a general creditor against the former participant. But such action would fall outside of ERISA.
The Tenth Circuit Court of Appeals has ruled that an employer's error causing a delay in enrolling a participant into the employer's health plan--which caused the employee to not have coverage for several months, which in turn caused him to be subject to a pre-existing condition exclusion resulting in significant unpaid medical bills--meant that no remedy was available to the participant under ERISA. The court ruled that the employer was a fiduciary and its actions in failing to timely enroll the participant were a fiduciary breach. However, the monetary damages sought to pay the unpaid medical bills were not "equitable relief" and could not be granted. The court also held that an order of restitution was inapplicable because the employee had not asked for restitution of funds already paid. Finally, the court stated that an order correcting the employee's date of entry into the plan was not proper because the underlying insurer was not a party to the litigation and there was no basis for the court to order the insurer to treat the employee as having been enrolled prior to the time of actual enrollment. (1)
The Eighth Circuit Court of Appeals has ruled that a participant must fully reimburse a plan from her special needs trust because the plan document required full reimbursement, and such reimbursement was "appropriate equitable relief" under ERISA. The plaintiff, a self-insured health plan paid over $469,000 in medical bills for the defendant participant who was injured in a car accident. The participant sued the parties who injured her and received a $700,000 settlement. After attorneys' fees and costs were paid, the balance ($417,477) was placed in the participant's special needs trust. The court refused to apply the make-whole and pro rata doctrines applicable under insurance law because these doctrines are inapplicable to self-insured health plans subject to ERISA. Further, the Court held that their application would have altered the express terms of the plan. (2)
A federal court in California has held that an employee's state law claims alleging entitlement to "reliance damages" for misrepresentations his employer made to him about the amount of pension benefits he would receive if he came to work for the employer were not preempted by ERISA. (3)
The Supreme Court has declined to review a Fourth Circuit decision that the insurer of an ERISA accidental death and dismemberment plan did not have to pay benefits for a participant who died in a car crash that he caused while driving legally intoxicated. (4)
Cashed Out Participants
A federal court for the Southern District of Iowa dismissed a claim brought by former participants in a 401(k) plan seeking compensatory damages because the participants lost money in investments made after cashing out their 401(k) accounts, stating such investments were not a part of the original 401(k) plan. The Court advised that the participants would be entitled to transfer their assets back into the 401(k) plan if they could demonstrate that they were deceived into transferring their money as a result of a fiduciary breach. (5)
Conversely, the Fourth Circuit has ruled that 401(k) plan participants who have cashed out still have standing to bring suit under ERISA Section 502(a)(2), because cashed out former employees remain "participants" in defined contribution retirement plans when seeking to recover amounts that should have been in their accounts but for the alleged fiduciary impropriety. (6)
On a similar note, the Eleventh Circuit determined that former plan participants could bring an action for breach of fiduciary duty concerning a defined contribution plan's loss in value, since the action stated a claim for benefits under ERISA and was not a suit for damages. The plaintiffs, all former employees of the plan sponsor, brought suit against plan fiduciaries alleging that they violated their fiduciary duty by allowing the plan to invest in sponsor stock even though the fiduciaries were backdating stock options and creating fraudulent transactions that artificially inflated the price of the sponsor stock held in the plan. The plaintiffs sought restoration of all losses to their accounts caused by the alleged fiduciary breaches, restoration of lost opportunity costs from the losses created, and a purging from the fiduciaries of profits made as a result of the breaches. The Circuit Court dismissed the case on the grounds that the former participants were not participants under ERISA Section 502(a)(2) and, therefore, lacked standing to sue for a breach of fiduciary duty under ERISA Section 409. On appeal, the Eleventh Circuit agreed with the plaintiff's position that they qualified as participants because their complaint asserted a claim for benefits instead of damages. In citing precedent, the Court noted that under ERISA, a "participant" entitled to bring a civil action for breach of fiduciary duty includes any employee or former employee of an employer who is, or who may become, eligible to receive a benefit of any type from an employee benefit plan. (1) ERISA permits actions to recover benefits, but it does not permit actions seeking extra-contractual damages. As such, the Court advised that whether the former employees had a colorable claim to vested benefits depended on the distinction between benefits and damages. (2)
Relying on prior decisions from the Third Circuit (3), Sixth Circuit (4), and the Seventh Circuit (5), the Eleventh Circuit determined that a complaint involving the decreased value of a defined contribution account due to a fiduciary breach was not a claim for damages because the recovery sought was limited to the difference between the benefits actually received and the benefits that would have been received had the plan fiduciaries fulfilled their obligations. (6)
The Ninth Circuit has joined six other circuits (including those noted above in addition to the first) in holding that former employees who have cashed out their individual accounts in a former employer's defined contribution plan are still "participants" who can sue to recover losses arising from a breach of fiduciary duty that allegedly reduced the amount of their benefits. Ninth Circuit held that because the cashed-out former employees had made a claim for benefits under the plans, they had the right to sue as participants for losses alleged to have occurred to their accounts while they were still in the plan. (7)
514. Can the DOL sue a fiduciary for money damages even though an identical claim brought by a class of participants against the same fiduciary has been the subject of a court-approved settlement?
Yes. Under the 1998 Eleventh Circuit holding in Herman v. South Carolina Nat'l Bank, (8) the Department of Labor (DOL) may sue a plan fiduciary for monetary damages even though an identical claim brought by a class of participants against the same fiduciary has been the subject of a court-approved settlement. The court ruled that the DOL may bring its identical suit even though it had prior notice of the participant's suit and the pending settlement.
In considering the fiduciary's argument that the DOL's actions were barred under the doctrine of res judicata, the court stated that it did not apply because the Secretary of Labor was not a party to the settlement and has "national public interests" that are "wholly distinct and separate from those of private litigants."
515. Does a fiduciary breach that causes no damages mandate a remedy?
No, in limited circumstances. The Seventh Circuit issued a very narrow ruling, holding the fact that a transaction is prohibited by ERISA, or violates some other provision of the Act does not necessarily mandate a remedy. (1)
In that case, a participant sued the plan and the trustees alleging that the trustees violated ERISA by engaging in two prohibited transactions and by failing to diversify plan investments. The alleged prohibited transactions included a loan from the plan to a party in interest (see Q 394), and a large investment in a real estate venture in which the plan trustees had a 63% financial stake.
The district court denied relief concerning the prohibited loan because it was well secured, carried an above market rate of interest, and was timely repaid. The district court further found that the real estate venture, which represented 88% of the plan's assets, did not constitute a prohibited transaction and that there was no duty to diversify because under the circumstances, it was prudent not to do so. The court based this decision on the experience and attention of the trustees and the significant profit of a 97% return the plan earned on its investment.
The Seventh Circuit affirmed the district court's decision stating, "the fact that a transaction is prohibited under ERISA does not necessarily mandate a remedy." Citing its decision in Leigh v. Engle, (2) the court further stated that the remedy of damages is not appropriate where there is no injury to the plan. In addition, the remedy of divestment is not possible where the plan cashed out of an investment, nor is the remedy of disgorgement of profits appropriate in the absence of evidence that the trustees engaged in self-dealing or transferred assets for their own personal interest.
Plan Remedies for Recoupment of Overpayments
The Seventh Circuit has ruled that ERISA Section 502 is not the only mechanism through which ERISA-covered entities may obtain reimbursement from plan participants for overpayment. Although plan fiduciaries are limited to obtaining equitable relief under ERISA Section 502(a)(3), the Court noted that the statutory language does not address the possibility of a recoupment device to recapture overpayments by the plan. Therefore, the plan sponsor was not precluded by ERISA from invoking contractual remedies for reimbursement to suspend the payment of benefits as reimbursement for past disability and pension plan overpayments. The restriction in Great-West Life &Annuity Ins. Co. v. Knudson, (2) did not apply here because the contractual remedy sought by the plan sponsor was not the seeking of a judicial relief beyond the scope of ERISA. (3)
The Supreme Court has ruled that a plan's reimbursement claim is an acceptable form of equitable relief when identifiable funds are in the beneficiary's possession. (4) In Sereboff, the participant and her spouse received health plan coverage for injuries sustained in a motor vehicle accident in the amount of approximately $75,000. Under the terms of the plan, they were required to reimburse the plan if their injuries were the result of an act or omission of another person and they received recovery from a third party. The participant and her spouse settled a civil action stemming from their accident for $750,000. They refused a request to reimburse the plan for the $75,000 coverage provided, but in anticipation of the litigation, agreed to place the $75,000 into an investment account pending resolution of the litigation.
The participant argued that the Supreme Court's decision in Great-West Life &Annuity Ins. Co. v. Knudson, (5) barred the plan's reimbursement claim because it was not "appropriate equitable relief" under ERISA. The Court rejected this argument stating that the plan sought to recover identifiable funds within the participant's possession. This, the Court noted, differed from the Great-West case because Great West did not seek to recover a particular fund from the defendant. The plan language regarding subrogation was sufficient to create an equitable lien by agreement which is considered equitable relief under ERISA.
516. What are the rules regarding the favorable tax and qualification treatment of restorative payments from a fiduciary breach?
The IRS has issued Revenue Ruling 2002-45 regarding the favorable tax and qualification treatment of payments issued to a qualified plan as restoration, or replacement payments, in connection with fiduciary breaches under ERISA. (6)
The Services advises under the ruling that a payment based on a "reasonable determination that there is a reasonable risk of liability for a breach of fiduciary duty and to restore losses" is a restorative payment and "as such, is not a contribution to a qualified plan." The determination as to whether or not a payment made to a plan qualifies as a restorative payment is based on the individual facts and circumstances. In general, payments made in order to restore some or all of a plan's losses due to the imprudent actions (or failure to act) of a fiduciary "that creates a reasonable risk of liability for breach of fiduciary duty" would be deemed to satisfy the facts and circumstances requirement of this ruling. (1)
Such restorative payments must be issued in a manner that treats plan participants who are similarly situated similarly with respect to the payment. However, the failure to allocate a share of a restorative payment to the account of fiduciary responsible for the losses will not result in a determination that there is different treatment for similarly situated participants.
Payments rendered pursuant to a Department of Labor (DOL) order or court approved settlement (including payments made under the Voluntary Fiduciary Correction Program (VFC) attributable to fiduciary breach, and lost earnings calculated under the Employee Plans Compliance Resolution System (EPCRS)) to a defined contribution plan are considered to be made on account of a reasonable risk of liability and, therefore, qualify as restorative payments. Payments made under the VFC provisions regarding delinquent elective deferrals, or any other payments to a plan required under the Internal Revenue Code, are not considered restorative.
Restorative payments made in accordance with Revenue Ruling 2002-45 are not subject to the annual additions limit of Internal Revenue Code Section 415(c) or the nondiscrimination requirements of Internal Code Section 401(a)(4) and, if applicable, Internal Revenue Code Sections 401(k)(3) or 401(m). Finally, restorative payments are not subject to the Internal Revenue Code Section 404 limit on deductions, nor to the Internal Revenue Code Section 4972 excise tax on nondeductible contributions.
517. How are the losses determined if a breaching fiduciary is held personally liable?
The measure of damages to be applied to a breaching fiduciary is determined by establishing what the plan would have earned in an investment in the absence of the fiduciary's breach. This concept is referred to as "making the plan whole." Where there are several alternative returns that could have been earned in the absence of the fiduciary breach, the court applies the one that is most favorable to the plan and its participants and beneficiaries. This has been established and upheld repeatedly by the courts. (2)
A breaching fiduciary is not held liable for all profits earned while acting in the capacity of a fiduciary. (3) A breaching fiduciary is liable for only those profits earned through the use of plan assets in a breach of fiduciary duty, regardless of whether or not the plan suffered a loss as a result of the breach. (4)
Further, plan losses incurred through a fiduciary breach may not be offset by gains earned by the fiduciary in a separate and distinct transaction. (1)
518. Can a fiduciary be subject to punitive damages for a breach of fiduciary duty?
ERISA does not expressly permit the imposition of punitive damages. However, some courts had held that the imposition of punitive damages to be paid to a plan is within a court's discretion. (2) The United States Supreme Court had left this question open. (3)
The Supreme Court later held that participants and beneficiaries may not recover punitive damages from a fiduciary for a breach of fiduciary duty. The only available remedies are the restoration of losses and disgorgement of profits, both of which must be paid to the plan. (4)
519. May a participant recover interest on improperly delayed benefits payments?
Yes, the ability of participants to recover prejudgment interest for periods of delay in the awarding of benefits has recently received favorable rulings in three cases of note.
In the case of Jackson v. Fortis Benefits Ins. Co., (5) the Eighth Circuit held that prejudgment interest may be awarded even when a plaintiff has recovered the delayed benefits without resorting to litigation. According to the court, prejudgment interest is available under ERISA so long as the plaintiff demonstrates that the plan administrator either breached his statutory obligations under ERISA or the terms of the governing plan.
Under Dunigan v. Metropolitan Life Ins., Co., (6) the Second Circuit ruled that a participant may sue to recover interest on benefits that were awarded late. Under this case, the defense argued that an award of interest was compensatory and not equitable, and, therefore, was not recoverable under ERISA Section 502(a)(3). In rejecting that argument, the court stated that an award of interest served to make the plaintiff whole in light of the defendant's unjustified delay in awarding the benefits. As such, the interest award qualified as equitable relief because it prevented the defendant from becoming unjustly enriched by retaining earnings on the monies involved during the period of unjustified delay.
Most recently, the United States District Court for the District of Minnesota ruled that "the plaintiff's suit for restitution (of interest on improperly delayed benefits payments) is equitable, not legal." In following the line of logic presented in the Dunigan case (above), the court opined that "[b]y not awarding her benefits during the periods which she claims were rightfully owed to her, defendant made a profit on that money in the form of interest earned. Plaintiff merely seeks to have defendant disgorge the interest it earned on the money due to her." (7)
520. Are fiduciaries subject to civil liability for the interference with ERISA protected rights?
ERISA Section 510 states that "[i]t shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan" or ERISA or to interfere with the attainment of such rights. The provisions of ERISA Section 502 (Civil Enforcement) govern the enforcement of ERISA Section 510.
Courts have held that where such interference with ERISA protected rights has been committed by a fiduciary that is also the employer, participants and beneficiaries may recover damages. (1)
521. What are the rules regarding co-fiduciary liability?
In addition to liability for their own conduct, plan fiduciaries may also be liable for a breach of fiduciary duty committed by co-fiduciaries. A fiduciary with respect to a plan may be liable for a breach of a fiduciary duty by another fiduciary with respect to the same plan in the following circumstances: (1) if he participates knowingly in, or knowingly undertakes to conceal, an act or omission of another fiduciary, knowing that the act or omission is a breach; (2) if, by a failure to comply with ERISA Section 404(a)(1) (requiring fiduciaries to discharge their duties solely in the interest of participants and their beneficiaries) in the administration of his responsibilities that give rise to his status as a fiduciary, he enables another fiduciary to commit a breach; or (3) if he has knowledge of a breach by another fiduciary, unless he makes reasonable efforts under the circumstances to remedy the breach. (2)
The ERISA Conference Report, as well as the Seventh Circuit, established the "knowing participation" rule that holds that in order for a co-fiduciary to be held liable, he must know that: (1) the other person is a fiduciary with respect to the plan; (2) the other person participated in the act that constituted the breach; and (3) the act itself constituted a breach. (3)
The ERISA Conference Report also states that a co-fiduciary is liable "if he knowingly undertakes to conceal a breach committed by the other [fiduciary]." In order for liability to be imposed for the concealment of a breach the "knowing participation" rule is applied, as the Conference Report provides: "[f]or the first fiduciary to be liable, he must know that the other is a fiduciary with regard to the plan, must know of the act, and must know it is a breach."
The First Circuit has held that, where an investment manager is involved, ERISA Section 405(d) specifically limits co-fiduciary liability to actions that involve a "knowing participation or concealment of" an act or omission of another fiduciary. Thus, where a nondiscretionary trustee bank expressed concern over the real estate valuations of plan assets by the investment manager (which later proved to be inappropriately inflated), the bank did not assume the liability to assure that the assets were properly valued. The court held that ERISA does not impose a "Good Samaritan" liability that would cause an institution to volunteer itself as a fiduciary regarding matters to which it would otherwise have no fiduciary liability simply because it undertakes reporting responsibilities that exceed its official mandate. (1)
A bank acting as a co-fiduciary was held liable under ERISA Section 405(a)(2) when it resigned as plan fiduciary and assigned the plan's assets to the administrator without taking the necessary steps to protect the assets of participants and beneficiaries, enabling the administrator to embezzle the plan's assets. The resigning fiduciary had reason to be concerned about the administrator (the plan sponsor's president) in that the administrator was repeatedly late in making remittances of the participant's 401(k) salary deferrals to the plan trust. (2)
In applying the "reasonable efforts" to remedy the breach requirement of ERISA Section 405(a)(3), regulations state that where a majority of plan fiduciaries plan on taking action that would clearly violate the prudence requirement of ERISA Section 404(a)(1)(B), the minority fiduciaries must take "all reasonable and legal steps" to prevent the majority fiduciaries from taking the planned action. If the minority fiduciaries can demonstrate that they unsuccessfully took all reasonable and legal steps to prevent the imprudent actions of the majority fiduciaries, they will not be held liable for the breach committed by the majority fiduciaries. (3)
A successor fiduciary is required to take whatever action is "reasonable" under the circumstances to remedy a breach by a former fiduciary if he knows of the existence of a breach by the prior fiduciary. The failure to take whatever steps are reasonable to remedy the breach will result in the successor fiduciary being held liable for a separate breach of fiduciary responsibility. (4)
522. Is there a right of co-fiduciary contribution?
A civil action may be brought by a plan fiduciary, on behalf of the plan, against another plan fiduciary in an effort to "enjoin any act or practice that violates" ERISA or the terms of the plan to which they serve as fiduciaries. He may also bring a civil action on behalf of the plan to seek appropriate equitable relief and to enforce any provisions of ERISA that a co-fiduciary may be violating. (5)
ERISA, however, does not provide for, or preclude a right of contribution between co-fiduciaries. Consequently, the issue has been settled on both sides by different courts and is, for all intents and purposes, unresolved.
One court held that a federal right of contribution may only arise where Congress has expressly provided for it, has clearly implied a right of contribution, or has granted the courts power to fashion a right of contribution under federal common law. Since, under ERISA, there has been no such right of contribution expressed, there can be no right of contribution by a co-fiduciary. (1) In a similar holding, another court held that a plan administrator who has been found liable for a breach of fiduciary duty by engaging in prohibited transactions does not have a right of contribution against the plan's trustees. (2) The Supreme Court has held that ERISA Section 409 only establishes a right of remedy on behalf of the plan. (3) The Ninth Circuit applied this holding when it held that a plan fiduciary is liable to the plan for any losses the plan suffers as a result of a breach, and because ERISA Section 409 only provides a remedy for the benefit of the plan, the breaching fiduciary has no right to the equitable remedy of contribution from co-fiduciaries. (4)
In holding that ERISA does not preclude a right of contribution from co-fiduciaries, a court held that traditional trust law does provide for contribution under ERISA's federal common law. (5) The Seventh Circuit has held in two separate cases that there is a right of contribution against more culpable trustees and that a district court has equitable power to require a more culpable fiduciary to indemnify passive co-fiduciaries for losses incurred by the plan. Also, a federal court may not refuse to approve a settlement agreement between the Department of Labor and certain fiduciaries where certain third party defendants who file an objection to the settlement agreement are not adversely affected by it. (6)
523. May nonfiduciaries who participate in a breach of fiduciary duty be held liable for monetary damages?
No. The Supreme Court has held that participants are not permitted to recover monetary damages from nonfiduciaries who knowingly participate in a fiduciary's breach of duty. The available relief to be applied against nonfiduciaries who knowingly participate in a fiduciary breach is found in equity. (7) Restitution has been deemed to be an appropriate equitable remedy that will require nonfiduciaries who are found liable for their active participation in a fiduciary breach to return to the plan all money earned through their active participation in the breach. (8)
Likewise, nonfiduciaries are not subject to right of contribution for their active participation in a breach. (9)
The First Circuit has held that nonfiduciaries who do not benefit from their actions may not be subject to non-monetary equitable remedies for their active participation in a fiduciary breach. Under this holding the Department of Labor could not seek an injunction to bar a nonfiduciary consultant from providing his services to plans even though the consultant had previously advised plan fiduciaries to violate ERISA. (10)
The Supreme Court has reconciled contradicting circuit court opinions on this issue, unanimously ruling that a fiduciary (even those culpable in the prohibited transaction at issue), participant, or beneficiary can sue a nonfiduciary party in interest for equitable relief for engaging in a prohibited transaction. Where the nonfiduciary party in interest engages in an ERISA Section 406 violation with a fiduciary, both may be held liable under ERISA Section 502(a)(3). The Supreme Court took a plan-based approach to this issue when reviewing ERISA Section 502(a)(3) by holding that it imposes a duty on nonfiduciary parties in interest that is separate and distinct from individual duties specifically imposed on fiduciaries under ERISA Sections 404 and 406. (1) This ruling may have a dramatic impact on future litigation stemming from prohibited transactions because it creates a potential second class of defendants in service providers (many of whom have much deeper pockets than individual fiduciaries) who knowingly participate in a fiduciary breach. The Supreme Court indicated in the Harris Trust ruling that an action for restitution under ERISA Section 502(a)(3) could be considered one for "equitable relief" as required in the Mertens case discussed above.
524. May a fiduciary enter into an agreement that relieves him from liability?
Generally speaking, no. Except as allowed by ERISA Section 405(b)(1) (a trust agreement that allocates specific duties) and ERISA Section405(d) (delegation of authority to an investment manager), any provision in an agreement or instrument that purports to relieve a fiduciary from responsibility or liability for any responsibility, obligation or duty under ERISA is void as against public policy. (2) However, plans and fiduciaries are allowed to purchase fiduciary insurance that provides coverage for potential liability for a fiduciary breach occurring in regard to an employee benefit plan. (3)
Plan fiduciaries are permitted to indemnify their employees who actually perform fiduciary services for the plan because this does not relieve the fiduciaries of their responsibilities under ERISA. An indemnification agreement that maintains a fiduciary's liability, but permits another party to satisfy any liability incurred by the fiduciary in a manner such as insurance coverage would provide, is permissible. (4)
Further, the Seventh Circuit has held that ERISA permits a plan trustee to be indemnified by a more culpable trustee for plan losses incurred due to a breach of fiduciary duty. (5)
Releases have been allowed from participants that relieve a fiduciary from past liability for a fiduciary breach where the releases were used to settle a bona fide dispute and had been given in exchange for consideration. (6) A release that conditions the distribution of a vested interest from a plan in exchange for the execution of the release must be provided for in the plan document in order for it to be valid under ERISA. (7)
525. May liquidated damages be awarded in a civil action for a breach of fiduciary duty?
There is case precedent that in civil actions under ERISA's civil enforcement provisions, reasonable liquidated damages may be awarded at the discretion of the court. (1)
Federal common law principles require the satisfaction of two conditions in order to award liquidated damages: (1) the damages caused by the breach must be difficult or impossible to estimate; and (2) the amount of the award must be a reasonable forecast of just compensation for the harm caused. (2)
Statute of Limitations
526. What is the statute of limitations for bringing a civil action for a fiduciary breach?
ERISA Section 413 provides that "[n]o action may be commenced under this title with respect to a fiduciary's breach of any responsibility, duty, or obligation under this part, after the earlier of:
(1) Six years after (a) the date of the last action which constituted a part of the breach or violation, or (b) in the case of an omission, the latest date on which the fiduciary could have cured the breach or violation; or
(2) Three years after the earliest date on which the plaintiffhad actual knowledge of the breach or violation; except that in the case of fraud or concealment, such action may be commenced not later than six years after the date of discovery of such breach or violation."
The Department of Labor (DOL) distinguishes fiduciary violations as either discrete or continuing violations. A discrete violation is one that occurs at a single moment in time. An example of a discrete violation would be the purchase of real property for more than fair market value. For a single discrete violation, the period for the statute of limitations is computed in a straightforward manner.
A continuing violation is one that continues past the initial moment when it occurs. An example of a continuing violation is an outstanding loan to a party in interest (which continues to be an ongoing violation so long as the loan is outstanding). With continuing violations, the DOL has argued the theory that the statute of limitations should have no direct effect other than making monetary relief unavailable with respect to pre-limitation portions of a violation.
In response to this argument, the Ninth Circuit has stated, "[t]he application of the continuing violation theory founders on the plain language of [ERISA Section 413(a)(2)].This section requires the plaintiff's knowledge to be measured from the 'earliest date' on which he or she knew of the breach.... Once a plaintiff knew of one breach, an awareness of later breaches would impart nothing materially new.... The earliest date on which a plaintiff became aware of any breach would thus start the limitation period of [ERISA Section 413(a)(2)] running." (3)
In an earlier similar ruling, the Ninth Circuit held that a continuous series of breaches may allow a plaintiff to argue for a new cause of action with each new breach. However, if the breaches are of the same nature and the plaintiff had actual knowledge of one of the breaches more than three years before bringing the civil action, ERISA Section 413(a)(2) bars the action. (1)
The Second Circuit has accepted the "continuing violation" theory allowing for a claim beyond the original 3- and 6-year statute of limitations under a specific application of the "prudent investor rule" (2) (See Q 284). Under the prudent investor rule, fiduciaries have a continuing obligation to monitor plan investments and to review and advise the subject plan to divest itself of unlawful or imprudent investments. The court held that a fiduciary obligation to continually monitor plan investments effectively permits actions under ERISA Section 404(a)(1)(B) to be brought after the initial 3- or 6-year statute of limitations. (3)
The Eighth Circuit Court of Appeals has applied a 10-year statute of limitations to lawsuits for benefit claims under ERISA. (4) In that case, the plaintiff filed a claim for benefits under her employer's health benefits plan in late 1997 and in early 1998. In mid-2001, she filed suit against her employer seeking to be compensated for the cost of medical procedures she claimed were wrongfully denied under the plan. The employer argued that the claim was barred due to the expiration of the statute of limitations under ERISA. The court noted that ERISA does not provide a statute of limitations for "abuse of discretion" and, therefore, the court looked to Iowa statutes for guidance. The court argued that the employer's improper denial for pre-authorization of a health benefits claim and abuse of discretion in denying the request for pre-authorization was analogous to an insured's claim against her insurer and a breach of contract subject to Iowa state law. Under that law, a 10-year statute of limitations applied.
527. Can a plan impose a statute of limitations on participants' right to file suit?
Under ERISA, a participant may file suit in federal court to recover benefits after their claim for benefits have been denied by an ERISA qualified plan. The individual has a right to sue only after they have exhausted a plan's claim procedures. Because of this, ERISA does not mandate a statute of limitations for a denial of benefits. This leaves states to rely on the most analagous statute laws in managing such claims (usually contracts law).
In Dye v. Associates First Capital Corp. Cafeteria Plan, (5) the court upheld a provision in a plan that provided that "no legal action may be commenced against an ERISA covered plan more than 120 days after receipt of the decision on appeal. "The court found that the plaintiff's claims were barred by this governing plan provision if not pursued within 120 days.
In determining whether this plan imposed statute of limitations was enforceable, the court employed a three factor test:
1. Is the plan imposed statute a subterfuge to avoid lawsuits (in this case, no; the plan was self-funded and did not exist to make a profit)?
2. Does the plan impose a similar time frame on the administrator to complete the review of the claim (in this case, yes)?
3. Does the applicable statute of limitations begin to run prior to the exhaustion of internal appeals (in this case, no)?
528. How is the statute of limitations affected by an act of fraud or concealment by a fiduciary?
If a breaching fiduciary has taken affirmative steps to hide his breach of fiduciary duty, the statute of limitations for bringing a civil action against him is six years from the discovery of the breach or violation. In determining if the six-year statute of limitations applies, the issue is whether or not the fiduciary took affirmative steps to conceal his breach, not whether or not the civil complaint actually alleges fraud. (1)
The plan or participant bringing a civil action must prove that the fiduciary undertook a course of conduct designed to conceal evidence of the wrongdoing, and that the plan and the participants did not have actual or constructive knowledge of evidence of the violation, despite the exercise of reasonable diligence. (2)
529. When does an ERISA cause of action accrue for purposes of the statute of limitations?
ERISA is silent as to what event constitutes the fiduciary breach at issue or the knowledge of that breach. There are, however, two different theories that have developed. The "discovery rule" holds that the statute of limitations begins to run when the violation is discovered. (3) The "actual knowledge of breach or violation" rule states that the participant plaintiff must have knowledge of all of the relevant facts that are sufficient to provide the participant knowledge that a fiduciary duty has been breached or that a provision of ERISA has been violated. (4)
The Ninth Circuit Court of Appeals has ruled that a clear breach of ERISA Section 503 duties regarding notification and review after the denial of a participant's claims, while not dispositive, is a significant factor for determining if the statute of limitations has started to run against the participant. (5) The Ninth Circuit holds that an ERISA cause of action accrues under Section 503 either at the time the benefits are actually denied or when the insured has reason to know the claim has been denied. The Court noted that the facts indicated that the participant had reason to know of the denial of benefits more than six years before he filed suit. Therefore, the Court ruled that the claim was time barred due to expiration of the statute of limitations.
530. When does the statute of limitations begin to run for a denial of benefits claim?
The statute of limitations for a denial of benefits claim begins to run when the participant receives notice of the denial. (1) Where a participant has made no formal request for benefits, the statute of limitations begins to run at the time that the participant "should have known" he was entitled to benefits. (2)
A claim for denial of benefits is time barred where the plaintiff could have obtained knowledge, through due diligence, that the denial of benefits was a fiduciary violation. (3)
531. Is knowledge of a breach by a former fiduciary imputed to a successor fiduciary for purposes of the statute of limitations?
The statute of limitations for a fiduciary breach begins to run when the plaintiff has actual knowledge of the breach. As such, knowledge of a fiduciary breach by a former fiduciary cannot be imputed to a successor fiduciary. A claim for a fiduciary breach by a successor trustee more than three years after the prior trustees had knowledge of the violation is not time barred. (4)
532. What is the statute of limitations in fiduciary cases where ERISA does not provide one?
ERISA specifically provides for a specific time limit under which suits to enforce certain fiduciary standards may be brought. Where ERISA does not expressly provide a statute of limitations for bringing a civil action relating to a plan, courts have applied state statutes of limitation that are most analogous to the claim. Kennedy v. Electricians Pension Plan IBEW #995, (5) Meade v. Pension Appeals & Review Comm., (6) Tolle v. Touche, Inc., (7) Lumpkin v. Envirodyne Indus., Inc., (8) Held v. Manufacturers Hanover Leasing Corp., (9) Giuffre v. Delta Airlines, (10) Bologna v. NMU Pension Tr., (11) and Nolan v. Aetna Life Ins. Co. (12)
In a civil action under ERISA Section 510 alleging discrimination or interference with a protected right, the analogous state statute of limitations is that governing employment discrimination, wrongful termination, or wrongful discharge. (13)
When a state statute of limitations expresses a hostile stance towards federal causes of action, it will not be applied to an action brought under ERISA. The Tenth Circuit has held that a very brief state statute of limitations that governed civil actions "seeking to impose liability based on a federal statute" would not be applied. (1)
533. How can the statute of limitations be tolled?
"Tolling" the statute of limitations (i.e., delaying it from running) can be accomplished by filing a civil action relating to the fiduciary issue in a state court. However, if the issue is one that should be filed in a federal court, the statute of limitations will not be tolled by the state action for purposes of filing a subsequent ERISA claim in federal court. (2)
534. When does a court have discretion to award attorneys' fees?
A court has discretion to award reasonable attorneys' fees to participants, beneficiaries, or fiduciaries. (3) This has been interpreted to include the costs of a civil action through appeal, paralegal fees, and the costs of collecting a post-judgment ERISA award. Free v. Briody (4) Mendez v. Teachers Ins. & Annuity Ass'n & College Retirement Equities Fund, (5) and Parise v. Ricelli Haulers, Inc. (6)
Courts have the discretion to deny attorneys' fees in cases that are not timely filed. (7)
In determining what are "reasonable" attorneys' fees under ERISA Section 502(g)(1), courts will utilize what is commonly referred to as the "lodestar method." Using the lodestar method, the court determines a reasonable number of hours spent on the case and then multiplies the hours by a reasonable hourly rate. The court may take into consideration such factors as the complexity of the case and the prevailing hourly rates of local attorneys. (8) Bowen v. Southtrust Bank of Ala., (9) Motion Picture Indus. Pension Plan v. The Klages Group. (10)
The Eleventh Circuit has held that a district court abuses its discretion regarding the decision whether or not to award attorneys' fees when it denies a motion for fees without stating the reasons for doing so. (11)
The Fifth Circuit has ruled that a dismissal of an action under ERISA for lack of subject matter jurisdiction precludes an award of attorney fees under ERISA Section 502(g)(1). (12)
535. Who may be awarded attorneys' fees in an ERISA civil action?
ERISA Section 502(g)(1) provides that "[i]n any action under [ERISA] by a participant, beneficiary, or fiduciary, the court in its discretion may allow a reasonable attorneys' fee and costs of action to either party" (emphasis added). Some courts have strictly interpreted this and have limited the recovery of attorneys' fees to only a participant, beneficiary or fiduciary. See Self Ins. Inst. of America, Inc. v. Korioth, (1) Saladino v. I.L.G.W.U. Nat'l Retirement Fund, (2) and M & R Inv. Co., Inc. v. Fitzsimmons. (3)
However, there have been cases where attorneys' fees were awarded to employers, pension plans and insurance companies as prevailing parties. See Credit Managers Association v. Kennesaw Life &Accident Ins. Co., (4) and Continental Can Co. v. Chicago Truck Drivers &Warehouse Workers Union Pension Fund. (5)
Further, out-of-court settlements of ERISA actions are not a bar to the awarding of attorneys' fees. (6)
The Eighth Circuit awarded attorneys' fees to an employee benefit plan administrator (under the Equal Access to Justice Act) because the administrator was the victim of a "baseless claim" filed by the Department of Labor (DOL). The DOL filed suit claiming that the administrator should have done more to ensure medical claim payments from the bankrupt plan sponsor of an ERISA covered health plan. The court stated that the DOL failed to show that it was "justified in substance or in the main" in filing suit against the administrator because it knew that the administrator had made "reasonable, prudent, and largely successful efforts to obtain as much funding as possible" for the health plan. (7)
536. What factors will a court consider in awarding attorneys' fees?
The majority of courts have applied a five-factor test for determining whether or not to award attorneys' fees in an ERISA civil action. The five factors are: (1) the degree of the offending party's culpability (bad faith); (2) the ability of the offending party to pay an award of attorneys' fees; (3) the deterrent factor of such an award; (4) whether or not the motion for an award of attorneys' fees is to benefit all participants and beneficiaries, or if the action was brought forth to resolve a significant legal question regarding ERISA; and (5) the relative merits of the parties' positions. Kimbro v. Atlantic Richfield Co., (8) Gray v. New England Tel. & Tel. Co., (9) Ironworkers Local No. 272 v. Bowen, (10) and Eaves v. Penn. (11)
All five factors need not be present in order for a court to award attorneys' fees. However, one court held that the element of bad faith did not need to be established in all instances in order for the court to exercise its discretion in awarding attorneys' fees. (12)
Another court held that attorneys' fees could be awarded on behalf of a plaintiff seeking payment of his vested interest in the plan after his termination where the plaintiff had limited financial resources and a favorable judgment would otherwise leave the plaintiff with an empty victory. (1)
The Supreme Court held that an award of attorneys' fees should not be reduced if a party has garnered substantial relief on the majority of the claims where the lawsuit consists of a number of related claims. (2)
Attorneys' fees may be awarded if the plaintiff succeeds on any significant issue that achieves part of the benefits sought in filing the initial action. (3)
An ERISA Section 502(g) award of attorneys' fees is inappropriate when such fees are specified as being contingent based. (4)
In applying the 5-factor test, the Ninth Circuit ruled that a plan participant who filed suit seeking correction of a miscalculation of her benefits was entitled to a recovery of attorneys' fees in spite of the fact that her employer had filed for IRS approval of a correction of the miscalculation at issue under what was then called the IRS' Voluntary Compliance Resolution (VCR) program. The court awarded attorneys' fees because it deemed the employer to have "relative culpability and bad faith" by refusing to advise the participant of the VCR submission, thereby making it necessary for her to file her civil action under an expiring statute of limitations in order to guarantee that her claim was protected. (5)
537. Does ERISA provide for the recovery of reasonable costs in addition to attorneys' fees?
ERISA provides for the recovery of "reasonable attorneys' fees and costs of action." (6) The Ninth Circuit held that the term "reasonable" applies as a modifier to the term "legal fees" and not to the term "costs." As such, the plaintiff was not permitted to recover "reasonable costs" for the full amount of fees charged by an expert witness. The court stated that the awarding of expert witness fees is governed by the Federal Rules of Civil Procedure (FRCP). (7)
Under the FRCP, an award of attorneys' fees may only be for the actual fees and costs that were incurred as a result of the conduct at issue. (8)
538. Can an award of attorneys' fees be discharged in bankruptcy?
If a fiduciary has been held accountable for an award of attorneys' fees for conduct that goes beyond mere negligence, the attorneys' fees may not be discharged in a bankruptcy proceeding. Further, there must be a fiduciary relationship between the parties to the suit, and the offending action must have occurred as a result of a breach of, or a failure to satisfy, a fiduciary obligation. (9)
When plan sponsors of defined benefit plans file for bankruptcy protection, the Pension Benefits Guaranty Corporation (PBGC) becomes a creditor. In 1992, the PBGC established its Bankruptcy Fee Monitoring Section to monitor attorneys' fees that are charged in large bankruptcy proceedings in which the PBGC is a major creditor (i.e., obligated to pay any unfunded liability to the bankrupt corporation's defined benefit plan). Established within the PBGC's General Counsel office, the program is designed to prevent excessive attorney and other professional fees from being charged in large bankruptcy cases. (1)
539. What special remedies exist for multiemployer plans?
Fiduciaries, participants, beneficiaries, employer organizations, and plan sponsors may bring civil actions to seek legal or equitable relief for damages caused by an act or omission of a party in relation to an ERISA covered multiemployer plan. Such actions may not be brought against the Department of Labor or the Pension Benefits Guaranty Corporation. (2)
The majority of cases against multiemployer plans involve actions seeking the payment of unpaid or delinquent plan contributions into the plan trust. Participating employers are required to make contributions to a multiemployer plan trust in accordance with "the terms of the plan or under the terms of a collectively bargained agreement." (3) Such actions may only be brought by fiduciaries to the multiemployer plan, not participants or beneficiaries. (4) Multiemployer plans are permitted to utilize the defense that they have relied on the terms of the collective bargaining agreement as it has been written. Therefore, any provision within the collective bargaining agreement that may have been incorrectly written may, nonetheless, be relied upon by the parties to the action. (5)
The National Labor Relations Board (NLRB) has exclusive jurisdiction in determining liability for delinquent multiemployer plan contributions under an expired collective bargaining agreement. This is based on the theory of unfair labor practices. Unless, and until, the collective bargaining agreement has expired federal district courts retain jurisdiction to hear cases against multiemployer plans for delinquent contributions. (6) If the NLRB determines that a collective bargaining agreement is invalid, the participating employers are not obligated to continue making contributions to the plan under the agreement. If the collective bargaining agreement has not been invalid from inception, participating employers must continue to make contributions to the plan unless, and until, the NLRB has ruled on the validity of it. Participating employers may not unilaterally cease making contributions to a multiemployer plan on the basis of a complaint filed with the NLRB regarding the validity of the collective bargaining agreement. (7)
In cases seeking the payment of delinquent contributions to a multiemployer plan brought by a fiduciary against a participating employer, the court
must award attorneys' fees and costs of the action where a judgment was awarded in favor of the plan. (1)
Actions to enforce ERISA's multiemployer plan provisions must be brought (1) within six years after the date on which the cause of action arises, or (2) three years after the earliest date on which the plaintiff acquires actual knowledge of the existence of the cause of action, whichever is later. As in any ERISA case where there has been an act of fraud or concealment regarding the fiduciary violation, the 3-year limit is extended to six years after the date of discovery of the act of fraud or concealment. (2)
Member employers in a multiemployer plan are required to make contributions to the plan under the terms of the collective bargaining agreement. (3) In a civil action to recover delinquent employer contributions wherein the plan emerges victorious on its claim, the court must award prejudgment interest on the delinquent contributions. (4) Further, the court must award the plan under such a judgment the greater of interest on the unpaid contributions or liquidated damages that have been provided for under the terms of the plan, plus reasonable attorneys' fees and costs of the action to enforce the contribution obligation. Liquidated damages are limited to 20% of the total amount of the outstanding delinquency. (5)
In a civil action to force a participating employer to make payments to a multiemployer plan under the terms of a collective bargaining agreement, a court must award, if it rules in favor of the plan, an amount equal to the greater of interest on the unpaid liability or liquidated damages (paid to the plan), reasonable attorneys' fees, and the costs of bringing the civil action. (6)
Practitioner's Pointer: In order for the DOL to impose civil penalties, the penalties must be applied against any recovery amount paid pursuant to a settlement agreement or court order. In other words, the plan fiduciaries must be placed on "official notice" that a prohibited transaction is outstanding and the DOL or court is ordering the reversal of the violation. If an outstanding violation is discovered prior to the plan being placed on official notice of its existence, it is important that the prohibited transaction be reversed prior to the issuance of an official notice (usually in the form of a "Notice Letter" from the Regional Office of the DOL). In reversing the violation prior to official notice, the 20% penalty may not be imposed by the DOL or a court.
Practitioner's Pointer: When negotiating any settlement with a class of participants who have brought suit against a plan, the attorneys are strongly urged to have the DOL join the action through ERISA Section 502(h). Unless and until ERISA is amended to eliminate this "double jeopardy," fiduciaries will be discouraged from settling participant suits, or will settle them for less (in anticipation of the later action by the DOL on the same issue).
Practitioner's Pointer: This holding should be strictly construed and narrowly applied. The Department of Labor (DOL) will aggressively enforce the prohibited transaction provisions (3) and the diversification provisions (4) of the Act. In the Etter case, the DOL was not involved in the detection of the investments in question nor in the enforcement efforts under ERISA to correct them. Had the DOL discovered such violations in the course of a routine investigation of the subject plan, the trustees probably would have been subject to an official enforcement order to correct the outstanding violations, and would have been subject to the possibility of ERISA Section 502(l) penalties (see Q 496) once they were placed on notice to reverse the prohibited transaction. The Seventh Circuit issued a caution in the Etter case that lends support to the DOL's enforcement position by saying that while prohibited transactions that do not result in losses may not be appropriate for a remedy, "it is a very dangerous area for trustees to explore, let alone attempt to exploit."
In addition, the Fifth Circuit has held that although a fiduciary breach that did not result in a loss to a plan is not subject to monetary damages, there is available equitable relief such as the suspension or removal of a violating fiduciary. (1)
Practitioner's Pointer: In the cases above, a review of the plan documents showed that the determination of whether to award benefits under applicable plan provisions was left to the discretion of the plan administrator. Specifically in the Jackson case, the Court held that it was the abuse of this discretion that resulted in a violation of the plan document and the general fiduciary provisions of ERISA. In exercising such discretion under plan documents, plan administrators are urged to carefully document the reasons for any delays with all supporting information and materials that support their position. This may serve to blunt any claim that the delay was an abuse of discretion.
Practitioner's Pointer: The DOL is likely to continue in its efforts to establish cases that accept the "continuing violation" theory to extend the statute of limitations when there is a failure to correct outstanding breaches that are of the same kind and nature as those that have been outstanding beyond the ERISA Section 413(a)(2) limits. Because of this, should plan representatives become aware of any outstanding violations, or of a series of actions by plan fiduciaries that may be violations of the same kind and nature, they should take remedial action to reverse or correct the violations that would create isolated violations and clearly establish the time frame under which the statute of limitations would run.
(1.) ERISA Sec. 409(b) (Emphasis added).
(2.) ERISA Sec. 409(a).
(3.) ERISA Sec. 409(a).
(4.) ERISA Sec. 502(1).
(5.) Blyler v. Hemmeter, 2001 U.S. App. LEXIS 4559 (9th Cir. 2001).
(6.) Chao v Meixner, 2007 WL 4225069 (N.D. GA 2007).
(1.) ERISA Sec. 502(a)(9).
(2.) See Kayes v. Pacific Lumber Co., 51 F. (3)d 1449 (9th Cir. 1995).
(3.) Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985).
(4.) Fisher v Penn Traffic Co., 2009 WL 910388 (2nd Cir. 2009).
(5.) LaRue v DeWolff, Boberg and Assoc, Inc. 2008 WL 440748 (S Ct 2008).
(6.) Varity Corp. v. Howe, 514 U.S. 1082 (1996).
(7.) Chao v. Anderson, 2007 U.S. Dist. LEXIS 34384 (E.D. Va. 2007).
(1.) DOL Adv. Op. 76-95.
(2.) DOL Adv. Op. 77-79.
(3.) ERISA Sec. 502(l).
(4.) EBSA Enforcement Manual, Ch. 35.
(5.) ERISA Sec. 502(l)(4).
(1.) ERISA Sec. 502(l)(2).
(2.) Prop. Labor Reg. [section] 2560. (5)02l-1(c).
(3.) Prop. Labor Reg. [section] 2560. (5)02l-1(e).
(4.) Prop. Labor Reg. [section] 2560. (5)02l-1(e).
(5.) EBSA Enforcement Manual, Ch. 34, p. 5.
(6.) ERISA Sec. 502(l)(2); Labor Reg. [section] 2570.83.
(7.) EBSA Enforcement Manual, Ch. 35, p. 5.
(1.) Labor Reg. [section] 2570.83(a).
(2.) EBSA Enforcement Manual, Ch. 35, p. 4.
(3.) Labor Reg. [section] 2570.83(b); EBSA Enforcement Manual, Ch. 35, pp. 4-5.
(4.) EBSA Enforcement Manual, Ch. 35, p. 5.
(5.) See 5 U.S.C. 704.
(6.) Labor Reg. [section] 2570.84; EBSA Enforcement Manual, Ch. 35, pp. 5-6.
(7.) Labor Reg. [section] 2570.85(a).
(1.) EBSA Enforcement Manual, Ch. 35, p. 6.
(2.) Preamble to Labor Reg. [section] 2570.80, nn. 4 & 5, 55 Fed. Reg. 25284.
(3.) EBSA Enforcement Manual, Ch. 35, p. 6.
(4.) Labor Reg. [section] 2570.85(c).
(5.) Labor Reg. [section] 2570.85(d).
(1.) Labor Reg. [section] 2570.85(b).
(2.) Labor Reg. [section] 2570.86.
(3.) ERISA Sec. 502(1); Labor Reg. [section] 2570.86; EBSA Enforcement Manual, Ch. 35, pp. 6-7.
(4.) Rodrigues v. Herman, 121 F. (3)d 1352 (9th Cir. 1997). Citywide Bank of Denver v. Herman, F. Supp. 966 (D Co. 1997), Huffer v. Herman, 168 F.Supp. (2)d 815, S.D.Ohio, 2001.
(1.) Rodrigues v. Herman, 121 F. (3)d 1352, 1355 (9th Cir. 1997); Citywide Bank of Denver v. Herman, 978 F. Supp. 966 (D.C. Colo. 1997).
(2.) ERISA Sec. 502(1).
(3.) Citywide Bank of Denver v. Herman, 978 F. Supp. 966 (D.C. Colo. 1997).
(4.) 2001 WL 345455 (S.D. Ohio 2001).
(1.) Inter-Modal Rail Employees Ass'n v. Atchison, Topeka & Santa Fe Railway, 520 U.S. 510 (1997).
(2.) See Ingersoll-Rand Co. v. McClendon, 498 U.S. 133 (1990).
(3.) Williams v. Mack Trucks, 2000 U.S. Dist. LEXIS 18758 (E.D. PA 2000).
(4.) 32 EBC 2578 (2004).
(5.) 7 F. (3)d 665 (7th Cir. 1993).
(6.) 24 F. (3)d 1491 (3rd Cir. 1994).
(1.) Mattel v. Mattel, 126 F. (3)d 794 (6th Cir. 1997).
(2.) McBride v. PLM International Inc., 179 F. (3)d 737 (9th Cir. 1999).
(3.) Crawford v. TRW Automotive U.S. LLC, 2009 WL 818952 (6th Cir. 2009).
(4.) Dunn v. Elco Enterprises, Inc., 2006 U.S. Dist. LEXIS 26169 (E.D. Mich. 2006).
(1.) P.L. 109-280.
(2.) See Furcini v. Equibank NA, 660 F. Supp. 1436 (W.D. Pa. 1987).
(3.) 930 F. (2)d 453 (6th Cir. 1991).
(4.) 898 F. (2)d 385 (3rd Cir. 1990).
(5.) 2001 U.S. Dist. LEXIS 15085 (N.D. Tex. 2001).
(6.) Trujillo v. Pacificorp, 2008 WL 1960765 (10th Cir. 2008).
(1.) McGann v. H & H Music Co., 946 F. (2)d 401 (5th Cir. 1991).
(2.) ERISA Sec. 502(a)(3).
(3.) Graden v. Conexant Systems Inc., 2007 WL 2177170 (3rd Cir. 2007).
(1.) Harzewski v. Guidant Corporation, 2007 WL 1598097 (7th Cir. 2007).
(2.) Ellis v. Rycenga Homes, Inc., 2007 WL 1032367 (W.D. MI 2007).
(3.) West v. Butler, 621 F. (2)d 240 (6th Cir. 1980).
(4.) ERISA Sec. 409(a).
(1.) H.R. Conf. Rep. No. 220, 105th Cong., 1st Sess., at 756-57 (1997).
(2.) Kerr v. Charles F. Vatterott & Co., 184 F. (3)d 938 (8th Cir. 1999).
(3.) Getting v. Fortis Benefits, 2001 U.S. App. LEXIS 3070 (10th Cir. 2001).
(4.) Verizon Employee Benefits Committee v. Adams, 36 EBC 2878 (N.D. Tex. 2006).
(1.) Negley v. Breads of the World Med. Plan, 2007 U.S. App. LEXIS 5099 (10th Cir. 2007).
(2.) Admin. Comm. of the Wal-Mart Stores, Inc. Associates' Health and Welfare Plan v. Shank, 2007 WL 2457664 (8th Cir. 2007).
(3.) Thurman v. Pfizer Inc.,, 484 F. (3)d 855 (6th Cir. 2007).
(4.) Eckelberry v. ReliaStar Life Ins. Co, 469 F. (3)d 340 (4th Cir. 2006), cert denied, 127 S.Ct. 2101.
(5.) Young v. Principal Financial Group, Inc., 2008 WL 1776590 (S.D. Iowa 2008).
(6.) In re: Mutual Funds Investment Litigation, 529 F. (3)d 207 (4th Cir. 2008).
(1.) Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989).
(2.) Lanfear v. Home Depot, Inc., 2008 WL 2916390 (11th Cir. 2008).
(3.) Graden v. Conexant Sys. Inc., 496 F. (3)d 291 (3rd Cir. 2007).
(4.) Bridges v. Am. Elec. Power Co., Inc., 498 F. (3)d 442 (6th Cir. 2007).
(5.) Harzewski v. Guidant Corp., 489 F. (3)d 799 (7th Cir. 2007).
(6.) Lanfear v. Home Depot, Inc., 2008 WL 2916390 (11th Cir. 2008).
(7.) Vaughn v. Bay Environmental Mgmt, Inc., 2008 WL 4276603 (9th Cir. 2008).
(8.) 140 F. (3)d 1413 (11th Cir. 1998), cert. denied, 119 S. Ct. 1030 (1999).
(1.) Etter v. J. Pease Constr. Co., 963 F. (2)d 1005 (7th Cir. 1992).
(2.) 727 F. (2)d 113 (7th Cir. 1984).
(3.) ERISA Section 406.
(4.) ERISA Section 404(a)(1)(C).
(1.) Donovan v. Cunningham, 716 F. (2)d 1455 (5th Cir. 1983), cert. denied, 467 U.S. 1257 (1984).
(2.) 534 U. S. 204.
(3.) Northcutt v. General Motors Hourly-Rate Employees Pension Plan, 467 F. (3)d 1031 (7th Cir. 2006).
(4.) Sereboff v. Mid Atl. Med. Services, Inc. 126 S. Ct. 1869 (2006).
(5.) 534 U. S. 204.
(6.) Rev. Rul. 2002-45, 2002-2 CB 116 (7-22-02).
(1.) Rev. Rul. 2002-45, 2002-2 CB 116, 117 (7-22-02).
(2.) See Leigh v. Engle, 858 F. (2)d 361 (7th Cir. 1988); Donovan v. Bierworth, 754 F. (2)d 1049 (2nd Cir. 1985); Dardaganis v. Grace Capital, Inc., 755 F. Supp. 85 (S.D. NY 1985).
(3.) American Fed'n of Unions, Local 102 v. Equitable Life Assurance Socy, 841 F. (2)d 658 (5th Cir. 1988).
(4.) ERISA Sec. 409(a); Donovan v. Mazzola, 716 F. (2)d 1226 (9th Cir. 1983), cert. denied, 464 U.S. 1040 (1984).
(1.) Leigh v. Engle, 858 F. (2)d 361 (7th Cir. 1988).
(2.) See Monson v. Century Mfg. Co., 739 F. (2)d 1293 (8th Cir. 1984).
(3.) See Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985).
(4.) Mertens v. Hewitt Assocs., 508 U.S. 248 (1993).
(5.) 245 F. (3)d 748 (8th Cir. 2001).
(6.) 2002 U.S. App. LEXIS 337 (2nd Cir. 2002).
(7.) Parke v. First Reliance Standard Life Ins. Co., 2002 U.S. Dist. LEXIS 18762, (D. Minn. 2002).
(1.) See Ingersoll-Rand Co. v. McClendon, 498 U.S. 133 (1990); Byrd v. MacPapers, Inc., 961 F. (2)d 157 (11th Cir. 1992).
(2.) ERISA Sec. 405(a).
(3.) H.R. Conf. Rep. No. 93-1280, 93rd Cong., 2nd Sess., 323 (1974) (ERISA Conference Report); Thornton v. Evans, 692 F. (2)d 1064 (7th Cir. 1982).
(1.) Beddall v. State St. Bank & Trust Co., 137 F. (3)d 12 (1st Cir. 1998).
(2.) Ream v. Frey, 107 F. (3)d 147 (3rd Cir. 1997).
(3.) Labor Reg. [section] 2509. (7)5-5, FR-10.
(4.) DOL Adv. Op. 76-95.
(5.) ERISA Sec. 502(a)(3).
(1.) Mutual Life Ins. Co. v. Yamfol, 706 F. Supp. 596 (N.D. 111. 1988).
(2.) Daniels v. National Employee Benefit Services, Inc., 877 F. Supp. 1067 (N.D. Ohio 1995).
(3.) Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985).
(4.) Kim v. Fujikawa, 871 F. (2)d 1427 (9th Cir. 1989).
(5.) Cohen v. Baker, 845 F. Supp. 289 (E.D. Pa. 1994).
(6.) Donovan v. Robbins, 752 F. (2)d 1170 (7th Cir. 1985); Free v. Briody, 732 F. (2)d 1331 (7th Cir. 1984).
(7.) Mertens v. Hewitt Assocs., 508 U.S. 248 (1993).
(8.) ERISA Sec. 502(a)(3); Landwehr v. DuPree, 72 F. (3)d 726 (9th Cir. 1995).
(9.) Glaziers & Glassblowers Union Local 252 Annuity Fund v. Newbridge Sec., Inc., 823 F. Supp. 1191 (E.D. Pa. 1993).
(10.) Reich v. Rowe, 20 F. (3)d 25 (1st Cir. 1994).
(1.) Harris Trust and Savings Bank, etc., et al. v. Salomon Smith Barney Inc., et al., 530 U.S. 238 (2000).
(2.) ERISA Sec. 410(a).
(3.) ERISA Sec. 410(b).
(4.) Labor Reg. [section] 2509. (7)5-4.
(5.) Free v. Briody, 732 F. (2)d 1331 (7th Cir. 1984).
(6.) Blessing & Grossman v. Struthers-Dunn, Inc., 1985 U.S. Dist. LEXIS 14159 (E.D. Pa. 1985).
(7.) Haberern v. Kaupp Vascular Surgeons Ltd. Defined Benefit Plan & Tr. Agreement, 24 F. (3)d 1491 (3rd Cir. 1994), cert. denied, 513 U.S. 1149 (1995).
(1.) See Doolan v. Doolan Steel Corp., 591 F. Supp. 1506 (E.D. Pa. 1984).
(2.) Idaho Plumbers Funds v. United Mechanical Contractors, Inc., 875 F. (2)d 212 (9th Cir. 1989).
(3.) Phillips v. Alaska Hotel & Restaurant Employees Pension Fund, 944 F. (2)d 509 (9th Cir. 1991).
(1.) Ziegler v. Connecticut Gen. Life Ins. Co., 916 F. (2)d 548 (9th Cir. 1990).
(2.) ERISA Section 404(a)(1)(B).
(3.) Morrissey v. Curran, 567 F. (2)d 546 (2nd Cir. 1977).
(4.) Shaw v. McFarland Clinic, P.C., 2004 U.S. App. LEXIS 6408 (8th Cir. 2004).
(5.) 2006 WL 2612743 (E.D. TX 2006).
(1.) ERISA Sec. 413; Kurz v. Philadelphia Elec. Co., 96 F. (3)d 1544 (3rd Cir. 1996).
(2.) J. Geils Band Employee Benefit Plan v. Smith Barney Shearson, Inc., 76 F. (3)d 1245 (1st Cir. 1996).
(3.) Connors v. Hallmark & Sons Coal Co., 935 F. (2)d 336 (D.C. Cir. 1991).
(4.) Gluck v. Unisys Corp., 960 F. (2)d 1168 (3rd Cir. 1992).
(5.) Chuck v. Hewlett Packard Company, 2006 WL 2052288 (9th Cir. 2006).
(1.) Price v. Provident Life & Accident Ins. Co., 2 F. (3)d 986 (9th Cir. 1993).
(2.) Brown v. Cuttermill Bus Service, 1991 U.S. Dist. LEXIS 9487 (E.D. NY 1991).
(3.) Vernau v. Vic's Market, 896 F. (2)d 43 (3rd Cir. 1990).
(4.) District 65 Retirement Tr. v. Prudential Sec., 925 F. Supp. 1551 (N.D. Ga. 1996).
(5.) 954 F. (2)d 1116 (5th Cir. 1992).
(6.) 966 F. (2)d 190 (6th Cir. 1992).
(7.) 977 F. (2)d 1129 (7th Cir. 1992).
(8.) 933 F. (2)d 449 (7th Cir.), cert. denied, 502 U.S. 939 (1991).
(9.) 912 F. (2)d 1197 (10th Cir. 1990).
(10.) 746 F. Supp. 238 (D.C. Mass. 1990).
(11.) 654 F. Supp. 637 (S.D. NY 1987).
(12.) 588 F. Supp. 1375 (E.D. Mich. 1984).
(13.) Sandberg v. KPMG Peat Marwick, LLP, 111 F. (3)d 331 (2nd Cir. 1997); Rich v. Zeneca, Inc., 845 F. Supp. 162 (D.C. Del. 1994).
(1.) Trustees of the Wyo. Laborers Health & Welfare Plan v. Morgan & Oswood Constr. Co., 850 F. (2)d 613 (10th Cir. 1988).
(2.) Shofer v. The Stuart Hack Co., 970 F. (2)d 1316 (4th Cir. 1992).
(3.) ERISA Sec. 502(g)(1).
(4.) 793 F. (2)d 807 (7th Cir. 1986).
(5.) 789 F.Supp 139 (S.D. NY 1993).
(6.) 672 F. Supp. 72 (N.D. NY 1987).
(7.) Schake v. Colt Indus. Operating Corp. Severance Plan, 960 F. (2)d 1188 (3rd Cir. 1992).
(8.) D'Emanuaelle v. Montgomery Ward & Co., 904 F. (2)d 1379 (9th Cir. 1990).
(9.) 760 F. Supp. 889 (M.D. Ala. 1991).
(10.) 757 F. Supp. 1082 (C.D. Cal. 1991).
(11.) Evans v. Bexley, 750 F. (2)d 1498 (11th Cir. 1985).
(12.) Cliburn v. Police Jury Assoc. of Louisiana, 165 F. (3)d 315 (5th Cir. 1999).
(1.) 53 F. (3)d 694 (5th Cir. 1995).
(2.) 754 F. (2)d 473 (2nd Cir. 1985).
(3.) 685 F. (2)d 283 (9th Cir. 1982).
(4.) 25 F. (3)d 743 (9th Cir. 1994).
(5.) 921 F. (2)d 126 (7th Cir. 1990).
(6.) Cefali v. Buffalo Brass Co., 748 F. Supp. 1011 (W.D. NY 1990).
(7.) Herman v. Schwent, 177 F. (3)d 1063 (8th Cir. 1999).
(8.) 889 F. (2)d 869 (9th Cir. 1989).
(9.) 792 F. (2)d 251 (1st Cir. 1986).
(10.) 695 F. (2)d 531 (11th Cir. 1983).
(11.) 587 F. (2)d 453 (10th Cir. 1978).
(12.) Gennamore v. Buffalo Sheet Metals, Inc. Pension Plan & Tr., 568 F. Supp. 931 (W.D. NY 1983).
(1.) Morales v. Plaxall, Inc., 541 F. Supp. 1387 (E.D. NY 1982).
(2.) Hensley v. Eckerhart, 461 U.S. 424 (1983).
(3.) Intl Bhd. of Teamsters Local No. 710 Pension Fund v. Janowski, 812 F. (2)d 295 (7th Cir. 1987).
(4.) Martin v. Arkansas Blue Cross/Blue Shield, 2001 U.S. App. LEXIS 22940 (8th Cir. 2001).
(5.) McElwaine v. U.S. West, Inc., 176 F. (3)d 1167 (9th Cir. 1999).
(6.) ERISA Sec. 502(g)(1).
(7.) Agredano v. Mutual of Omaha Cos., 75 F. (3)d 541 (9th Cir. 1996).
(8.) Browning v. Kramer, 931 F. (2)d 340 (5th Cir. 1991).
(9.) In re Eisenberg, 189 BR 725 (1995).
(1.) Dept of Labor News Release, USDL 92-343, (June 5, 1992).
(2.) ERISA Sec. 4301(a).
(3.) ERISA Sec. 515.
(4.) ERISA Sec. 502(g).
(5.) Central Pa. Teamsters Pension Fund v. McCormack Dray Line, Inc., 85 F. (3)d 1098 (3rd Cir. 1996).
(6.) Smith v. Candler Coffee Shop, 1996 U.S. Dist. LEXIS 10935 (S.D. NY 1996).
(7.) MacKillop v. Lowe's Market, Inc., 58 F. (3)d 1441 (9th Cir. 1995).
(1.) ERISA Sec. 502(g)(2); O'Hare v. General Marine Transp. Corp., 740 F. (2)d 160 (2nd Cir. 1984); Greater Kansas City Laborers Pension Fund v. Hummel, 738 F. (2)d 926 (8th Cir. 1984); Operating Eng'rs Pension Tr. v. Reed, 726 F. (2)d 513 (9th Cir. 1984).
(2.) ERISA Sec. 4301(f).
(3.) ERISA Sec. 515.
(4.) ERISA Sec. 502(g)(2)(B); Bricklayers Pension Tr. Fund v. Taiariol, 671 F. (2)d 988 (6th Cir. 1982).
(5.) ERISA Secs. 502(g)(2)(C), 502(g)(2)(D); Teamsters Pension Tr. Fund v. John Tinney Delivery Serv., Inc., 732 F. (2)d 319 (3rd Cir. 1984).
(6.) ERISA Sec. 502(g).
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|Date:||Jan 1, 2010|
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