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For Your Benefits

Issue #4 Robert D. Rothacker, David P. Olson, Sarah M. Linsley, Marla B. Anderson, Charles E. Harper, Gary R. Clark, Fred Gants, Jeffrey Morris, Paul D. Bauer, Otto W. Immel

This issue contains the following articles:

From the Editor

U.S. Supreme Court Affords ERISA Plan Administrators Deference

Tax Treatment of Health Coverage for Children Under 27

Quarles & Brady Quick Hits

Introducing Paul E. Parrish


Welcome to the fourth issue of the Quarles & Brady Employee Benefits and Executive Compensation Group's For Your Benefits, a newsletter dedicated to keeping benefit plan managers and HR and compensation professionals informed of legal changes affecting benefit programs. We will continue to supplement this regular publication with timely, special alerts that provide in-depth coverage of significant changes.


Although ERISA does not mandate that courts apply a specific standard of review when looking at a plan administrator's decision to deny benefits, the Supreme Court has previously held that where a plan administrator is granted the discretion to interpret the terms of a plan, a court must generally defer to the plan administrator's decision unless such decision was arbitrary. In Conkright v. Frommert et al., the U.S. Supreme Court held that this deferential standard of review will apply even to a plan administrator's second attempt to interpret the same plan terms.

This case involved Xerox employees who left the company in the 1980's, received a lump-sum distribution of pension plan benefits that they had earned under the company's plan up to that point, and were later rehired. Upon rehire, the Xerox employees sued the pension plan and its administrators under ERISA because they disagreed with the accounting method the plan administrator used to calculate the offset of their current benefits by the benefits they had already received.

The Second Circuit agreed with the affected participants that the plan administrator's interpretation of the pension offset calculation for rehired employees under the plan was unreasonable. Accordingly, on remand, the plan administrator proposed a new approach to the District Court. The District Court declined to give deference to the plan administrator's new interpretation, finding that the second interpretation was also unreasonable, and the Second Circuit affirmed. In doing so, the Second Circuit crafted an exception to the Supreme Court precedent that an ERISA plan administrator is entitled to deference in exercising its discretionary authority to interpret a plan.

The Supreme Court rejected the Second Circuit's "one strike and you're out" approach that a court need not give a plan administrator deference after it finds that the plan administrator's previous interpretations violate ERISA. The Supreme Court found no basis for this holding in the existing precedent, terms of the plan, principles of trust law or purposes of ERISA to promote efficiency, predictability and uniformity. The Court found that the plan administrator's initial interpretation was no more than a single honest mistake that did not warrant stripping the plan administrator of deference for decisions related to interpretations of a plan. Chief Justice John Roberts, writing for the majority, perhaps summed it up best in the first sentence of the Court's opinion - "People make mistakes."

Q&B Key: This reinforcement of the deferential standard of review and extension of this principle to decisions made outside of the claims procedure is good news for plan administrators. This decision also provides a reminder that employers should periodically review their plan documents and summary plan descriptions to ensure that they contain language that delegates to plan fiduciaries the discretion to interpret the plan. Without that type of language, a plan administrator's decision is much more susceptible to being overturned by a court.


Under the recently enacted health care reform legislation, effective for plan years beginning on or after September 23, 2010, employer health plans that offer dependent coverage must extend that coverage to employees' adult children until age 26. The health care reform act also amended the Internal Revenue Code to make coverage of an adult child non-taxable, even if such child is not an employee's tax dependent. This change in tax treatment is effective March 30, 2010.

On April 28, the IRS issued Notice 2010-38, which provides guidance on the tax treatment of health coverage for adult children. In summary, the Notice:

  • Clarifies that coverage will not be taxable through the end of the year in which the child reaches age 26 (even though the law only requires coverage up to age 26).
  • Indicates that employees may begin paying for coverage for such children on a pre-tax basis under an employer's cafeteria plan as of March 20, 2010 even though employers have until the end of the year to amend their cafeteria plans to reflect this change.
  • States that the IRS intends to modify cafeteria plan "change in status" regulations to reflect inclusion of nondependent children under age 27.

Q&B Key: Employers that already offer health plan coverage to employees' non-dependent children may stop reporting imputed income for federal income tax purposes as of March 30. Employers in states that do not automatically adopt changes in federal tax law, such as Wisconsin, will need to continue to report imputed income with respect to such coverage until such time as state law changes. Employers may also need to make changes to their cafeteria plan documents by the December 31, 2010 deadline.


COBRA Subsidy Extension. Under a recently passed extension, workers who lose their jobs between September 1, 2008 and May 31, 2010 may be eligible for the government-funded COBRA premium subsidy. That subsidy had expired for employees losing their jobs after the end of March, but was retroactively extended for involuntary terminations occurring before June 1. Plan administrators must act to give individuals who were involuntarily terminated on or after April 1, but prior to the passage of the extension and who have already declined or discontinued COBRA another opportunity to elect COBRA coverage.

The Department of Labor has published updated notices that reflect this extension and other information at its Web site.

Health Care Reform and COBRA. The DOL recently published a short series of Q&As on the impact of health care reform on COBRA.

Puerto Rico Plans. The IRS has stated that one of its priorities for FY 2010 is to develop strategies and capabilities to address key international issues impacting the Employee Plans sector. With this in mind, we thought it was a good time to remind companies that sponsor "dual-qualified" plans (which cover employees in the U.S. and Puerto Rico) that the opportunity to transfer assets from a U.S. plan to a Puerto Rico only plan on a non-taxable basis expires at the end of this year.

Health Care Reform Seminar. Please join us for our upcoming seminar "What Health Care Reform Means for Employers." This will be presented live in Milwaukee on May 5, in Phoenix on May 19, and available everywhere via webcast starting May 5. For more information or to register, visit our Milwaukee or Phoenix event pages.


We are pleased to welcome Paul Parrish to our ERISA Litigation Team. Mr. Parrish practices out of our new Tampa, Florida office and has significant experience representing plans, employers, participants and beneficiaries in the entire spectrum of ERISA litigation matters.

If you have questions regarding employee benefits and executive compensation, please contact one of the of the following members of the Employee Benefits and Executive Compensation Law Group or your Quarles & Brady attorney: Paul Jacobson at (414) 277-5631 / [email protected], Robert Rothacker at (414) 277-5643 / [email protected], David Olson at (414) 277-5671 / [email protected], Amy Ciepluch at (414) 277-5585 / [email protected], Sarah Linsley at (312) 715-5075 / [email protected], Kerri Hutchison at (414) 277-5287 / [email protected] or Marla Anderson at (414) 277-5453 / [email protected].

If you have questions regarding ERISA litigation matters, please contact one of the following members of the ERISA Litigation Group or your Quarles & Brady attorney: Charles Harper at (312) 715-5076 / [email protected], Gary Clark at (312) 715-5040 / [email protected], Fred Gants at (608) 283-2618 / [email protected], Valerie Bailey-Rihn at (608) 283-2407 / [email protected], Jeffrey Morris at (414) 277-5659 / [email protected], Paul Bauer at (414) 277-5139 or [email protected], Otto Immel at (239) 659-5041 / [email protected], Marian Zapata-Rossa at (602) 229-5447 / [email protected] or Paul Parrish at [email protected]

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