Involuntary Transfer of Prisoners’ Pension Benefits Violates Anti-Alienation Rules

ERISA's anti-alienation provision prohibits enforcement of a state law under which prison wardens were to notify pension plans to send prisoners' benefit payments to the inmate's institutional address, according to a 6th Circuit decision affirming a district court ruling. [DaimlerChrysler v. Cox, No. 05-1716]

Under Michigan's State Correctional Facility Reimbursement Act, pension benefits are included among a prisoner's assets for purposes of potential reimbursement to the state for costs incurred during a prisoner's incarceration. If a state court awarded the state a percentage of a prisoner's pension benefits, then the prisoner would be ordered to inform the pension plan that benefit payments were to be sent to the institutional address, where the payments were to have been deposited in institutional accounts. If a prisoner complies with that order and directs the pension plan to send the payments to the institutional address, then garnishment by the state for reimbursement under SCFRA is permissible without conflict with ERISA.

However, if a prisoner refused to direct the pension plan as ordered, then SCFRA called for the prison warden to notify the pension plan to send the benefit payments to the inmate's institutional address.  The court found that SCFRA requirement to violate ERISA's anti-alienation provision.  Refusing the state's contention that its redirection of benefit payments only encumbered those amounts after they left plan control, the 6th Circuit observed that the SCFRA notices from prison wardens would be enforced against plan benefits before distribution against the direction of the prisoners, in violation of ERISA.

Opinion: Retire the Number $450 Billion

A PBGC spokesman said Monday that $450 billion in pension underfunding was still the official government estimate.

Reuters 5/15

Hold on, what's wrong with this picture? The Administration wants defined benefit pension plans to value their funded status on a current snapshot basis with asset values smoothed over no more than a year and funding of gains or losses accelerated, but we're supposed to use a dusty old, very opaque figure that no outside expert can duplicate to guide the development of major policy initiatives?

Even the Credit Suisse numbers alluded to in Reuters story are more pessimistic than need be: based on corporate financial statements, Zion's numbers include foreign pension plans and unfunded nonqualified plans. Even by year-end 2005 the overall funded status of U.S. qualified pension plans was probably close to even. And the updates projected by American Academy of Actuaries senior pension fellow Ron Gebhardtsbauer suggest that by the effective date of any pension reform legislation, a significant majority of pension plans will have assets exceeding the value of their obligations.

Do we really need to pretend that the very transient legend of $450 billion shortfall still exists to justify continuing to work toward pension reform? How about pretending instead that we're living under the new rules we seek to require, and start by updating that number to the present.

Chemical Financial Partially Freezes

Chemical Financial Corporation, a Michigan bank holding company, will partially freeze its defined benefit pension plan, effective 6/30/2006. [Form 8-K, 5/15]  Benefit accruals will be frozen for employees with less than 15 years of service in exchange for an enhanced 401(k) contribution.

The company anticipates net cost savings of $2 million in 2007 from the pension freeze.  In its most recent annual financial statement, Chemical Financial reported pension service costs for the 2005 year of $4.895, a portion of which will now be eliminated due to the freeze. The company's press release did not disclose the anticipated effect under FAS 88 of the curtailment event, which will probably be a loss recognized during 2006 arising from the recognition of previously unrecognized losses, net of the partial reduction in the plan's projected benefit obligation.

Subrogation Reimbursement Approved by High Court

An ERISA plan's action seeking reimbursement under the plan's subrogation agreement constitutes "equitable relief" under ERISA §502(a)(3), according to a unanimous decision of the U.S. Supreme Court, resolving disagreement among the appellate courts. [Sereboff v. Mid Atlantic Medical Services, Inc., No. 05-260]

The court distinguished the case from its previous adverse ruling in Great-West Life & Annuity Ins. Co. v. Knudson insofar as recovery of paid medical expense benefits is being sought through an equitable lien from specifically identified funds remaining in the possession of the individual from a suit against third parties, whereas in Knudon those funds had been placed in trust under state law. The basis for the plan's claim was found equitable since its subrogation provision specifically identified a particular fund as the source of the claimed recovery distinct from the individual's general assets. Tracing requirements are inapplicable, nor is identification of the funds required at the time the contract between the plan and the individual is effectively made under the plan's terms.

SPD Must Describe Procedures for Proving Benefit Entitlement

If a multiemployer plan has a policy requiring an employee to prove entitlement to benefits in a situation where an employer may have underreported covered employment, then that policy must be stated in the plan's summary plan description, according to a 2nd Circuit decision vacating a district court decision on that issue. [Wilkins v. Mason Tenders District Council Pension Fund, 05-2303-cv, 4/21/06]

If a plan participant claimed benefits based on covered work that had not been reported by a participating employer, early practice of the plan had been to require the worker to submit pay stubs as evidence that the underreported work had been performed at the union’s hourly rate. A subsequent change in the plan’s practice dropped the specific insistence on pay stubs, but continued to require a claimant to prove additional covered employment. Neither policy had been expressly described in the plan’s SPD. Nonetheless, since the individual in this case could provide no evidence beyond his own affidavit, the district court ruled against the claim under the arbitrary and capricious standard of review.

The appellate court drew the distinction that while benefit denials are to be reviewed under the arbitrary and capricious standard where the plan gives discretionary authority to the plan administrator, an SPD claim is to be judged de novo, with no deference owed to plan administrators for cases where the SPD has not included information required under the applicable statute and regulations. The appellate court then stated that the claimant “quite clearly” would reasonably anticipate receiving benefits based on covered employment, without addressing the practical question of how a plan fiduciary can reasonably pay benefits without concrete evidence of the claimed employment. Since the plan’s natural policy of expecting concrete data to be presented in a claim dispute could have the obvious outcome of affecting the final benefit determination, the appellate court found the SPD deficient in failing to state the policy.

Obviously, the issue of having complete, accurate data for benefit determinations is not unique to the notorious data issues that plague multiemployer plans – Has there ever been the plan that can absolutely attest to having had perfect data? Yet even more “quite clearly” than the appellate court’s reasoning, plan administrators cannot base benefit payments on nothing more evidentiary than the plan participant’s own affidavit, particularly when one is contesting existing data. Even so, the appellate court’s decision in this case warns plans that their SPDs ought not assume that plan participants understand all details of responsibilities of the parties to a benefits dispute, but should explicitly include any plan policies that might affect the benefit determination.

Pilot Retirees’ Suit Against PBGC Dismissed

Retired U.S. Airways pilots' lawsuit against the Pension Benefit Guaranty Corporation alleging errors in the calculation of estimated benefits under their terminated pension plan has been dismissed by the D.C. appellate court, which found that the retirees had not yet exhausted administrative remedies. [Boivin v. U.S. Airways, No. 03cv02373jr]

When the pension plan terminated in 2003, the PBGC began paying estimated benefits. Without waiting for the conclusion of final benefit determinations, retirees filed suit against U.S. Airways and the PBGC on the basis of the estimated benefit amounts, alleging four primary errors in the calculations and claiming that waiting through the usual 2-3 year formal benefit would cause irreparable harm. The PBGC has since changed its estimates on two of the contested issues in favor of the retirees, but argued against litigation of the remaining issues outside of the agency's established administrative remedies for individuals dissatisfied with its benefit determinations. Finding retirees' arguments for an exception unpersuasive, the appellate court sided with the PBGC without directly addressing the merits of the two remaining alleged errors.

Energy Department Switches Off DB Pensions

The U.S. Department of Energy has unilaterally decided to cease reimbusing its federal government contractors for costs associated with defined benefit pension plans for new contractor employees. Instead, the DOE will only reimburse costs for market-based defined contribution plans. Similarly, for new contractor employees the DOE will not reimburse costs for employees' medical plans unless the plans are market-based. The DOE anticipates full implementation of the new policy no later than March 1, 2007. [Notice DOE N 351.1; Press Release]