The ERISA Litigation Newsletter - June 2014

Edited by Stacey CS Cerrone and Russell L. Hirschhorn

EDITOR'S OVERVIEW

In this month's issue, our authors address severance benefit claims and ERISA disclosure requirements. In our first article, Joe Clark addresses whether a plan administrator should conduct an independent investigation into the reasons for an individual's termination of employment before deciding a claim for severance. In our second article, Ira Bogner and Adam Scoll address the steady stream of new ERISA-related disclosure and reporting obligations being imposed on plan fiduciaries.

As always, the Rulings, Filings, and Settlements of Interest contains an interesting array of topics, including statute of limitations, beneficiary designations, ERISA's Whistleblower provisions, deferential review plan language, fiduciary status of 401(k) Plan service providers, coverage of same-sex spouses and ACA issues.

VIEW FROM PROSKAUER: INVESTIGATING AND DECIDING SEVERANCE BENEFITS CLAIMS*

By Joseph Clark

Plan administrators charged with administering Employee Retirement Income Security Act-governed severance plans are often confronted with the question of whether they should conduct an independent investigation into the reasons the employer-plan sponsor terminated an individual's employment before deciding whether to grant or deny the individual's claim for severance benefits. The decision to conduct such an investigation, and, the breadth of such an investigation, may have consequences in the event of litigation.

This article provides some guidance to plan fiduciaries in evaluating claims for severance benefits.

Many severance plans provide that an employee is ineligible for benefits if terminated "for cause" and define cause as, among other things: neglect in performing one's duties, misconduct, or unsatisfactory performance. A threshold question for those charged with the responsibility for deciding severance benefit claims and appeals is thus whether the employee was in fact terminated "for cause." Whether and, if so, how "for cause" is defined is controlled by the terms of the plan.1 What is required of plan fiduciaries under these circumstances? May they accept the employer's stated reason for the employee's discharge? Must they conduct an independent investigation into the reasons for the employee's discharge? Somewhat surprisingly, there are relatively few reported decisions addressing whether a plan fiduciary has an obligation to conduct an independent investigation into an employer's reasons for discharging an employee.

As a preliminary matter, in deciding whether an investigation is warranted, it is important to be mindful of the fact that severance plan participants, like all other ERISA plan participants, are statutorily entitled to a "full and fair review by the appropriate named fiduciary of the decision denying the claim."2 This means that a plan administrator must "take[] into account all comments, documents, records, and other information submitted by the claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination."3 Moreover, pursuant to ERISA §503(1), participants must be provided "adequate notice in writing . . . setting forth the specific reasons for such denial, written in a manner calculated to be understood by the participant."

Is An Investigation Warranted?

Where a plan fiduciary is in possession of credible evidence that an employer terminated an employee for cause, courts have generally concluded that there is no requirement that a plan fiduciary conduct an independent investigation into the reasons for the employee's discharge from employment. For example, in Estate of Schwing v. Lilly Health Plan,4 the U.S. Court of Appeals for the Third Circuit held that a plan fiduciary may reasonably rely on information obtained from the employer in deciding whether to deny a claim for severance benefits on account of an individual being terminated for cause. There, a sales employee was terminated for falsifying call data. Although the employee denied that he had ever admitted any wrongdoing, and argued that he was fired as an act of retaliation, the plan administrator determined that the employee was ineligible for severance benefits because he was terminated for misconduct. The Third Circuit concluded that there is no requirement that a plan administrator faced with an issue of who is to be believed must conduct an independent investigation into a claimant's arguments, and that, in this case, there was ample evidence of the employee's misconduct to support the denial of his claim for severance benefits.

Similarly, the U.S. Court of Appeals for the Sixth Circuit held that if a plan's language clearly identifies the conduct that will render an individual ineligible for severance benefits, and the employer presents evidence that a terminated employee engaged in such conduct, a plan administrator need not investigate further before denying benefits. In Fahrner v. United Transp. Union Discipline Income Prot. Program,5 an employee was terminated for insubordination after he failed to comply with his employer's requests that he provide certain information after he took a medical leave of absence. The court observed that the plan administrator was provided with information that the employer compiled during its evaluation of whether to terminate the employee, and determined that this constituted sufficient evidence that the employee failed to comply with his employer's procedures and instructions. The plan administrator was thus found to be justified in denying plaintiff's claim for severance benefits.

A plan administrator may not, however, "cherry-pick the evidence it prefers while ignoring significant evidence to the contrary."6 In Mohammed v. Sanofi-Aventis Pharmaceuticals, an employee was terminated for improperly purchasing equipment with employer funds. The plan administrator denied his claim for severance benefits based on an oral summary and memorandum from the employer. The administrator wasn't presented with and didn't review the employee's appeal letter. In the court's view, this rendered the plan administrator's decision arbitrary and capricious, and the court remanded the case to the plan administrator for further consideration.

Privilege Considerations

ERISA's claims regulations provide that a participant is entitled to all "documents, records, and other information relevant to the [employee's] claim for benefits."7 This includes any information considered or relied upon as part of the plan fiduciary's determination. Accordingly, a plan administrator who denies a claim for severance based on a report of an internal investigation conducted by the employer may subject that report, and the underlying investigation, to discovery. In order to avoid this risk, the administrator may prefer to conduct its own investigation, rather than subject to discovery a report that the employer otherwise intends to keep confidential.

Proskauer's Perspective

The guiding principle to be drawn from the relatively sparse case law is that, in deciding whether to grant or deny an individual's claim for severance benefits, plan fiduciaries should be able to reasonably rely on credible evidence—without conducting an independent investigation—that an individual's employment was terminated for cause. But administrators need to be sensitive to the risks of exposing to discovery any information on which it relies, even if that information emanates from the employer.

DEATH, TAXES AND ...ERISA DISCLOSURE REGULATIONS?*

By Ira G. Bogner and Adam Scoll

There are few sure things in life, and although it is probably safe to say that ERISA disclosure regulations would not be considered one of them, there has certainly been a steady stream of new ERISA-related disclosure and reporting obligations being imposed on plan fiduciaries.

The latest installment from the U.S. Department of Labor came out on March 12, 2014, in the form of a proposed amendment to its final regulations under Section 408(b)(2) of ERISA (commonly referred to as the "necessary services exemption"). The proposed amendment, if finalized in its current form, would require covered service providers to furnish a "guide" to assist ERISA plan fiduciaries in reviewing the initial disclosures required by the final regulations, but only if the required initial disclosures are contained in multiple or "lengthy" documents.

The final regulations were part of a three-pronged approach to new disclosure rules issued by the DOL within the past decade that was aimed at improving the transparency of plan fees and conflicts of interest to plan fiduciaries, the DOL and plan participants and beneficiaries:

First came the changes to the Form 5500 Schedule C reporting requirements — these relate to a plan's reporting requirements to the DOL on the plan's annual Form 5500 Return/Report; Next came new ERISA Section 404(a)(5) participant-level disclosure rules — these relate to a 401(k)-type plan's reporting requirements to its participants and beneficiaries; and Finally, new ERISA Section 408(b)(2) service provider compensation disclosure regulations (i.e., the final regulations) — these relate to an ERISA pension plan service provider's reporting requirements to its ERISA pension plan clients. Together, these rules were intended to provide (i) plan fiduciaries with the information they need to assess the reasonableness of the compensation that is paid for the services being rendered to the plan, and hopefully flesh out any potential service provider conflicts of interest and (ii) plan participants and beneficiaries with the information they need to effectively manage and invest the money they contribute to their 401(k)-type pension plans.

Given the process for ultimately issuing all of these rules first, proposed regulations, then public comments, then possibly interim final regulations, followed finally by final regulations which...