United States: High Court Employee Benefits Cases: A Review And Look Ahead

Having settled into the new year, we reflect on decisions from the U.S. Supreme Court in 2013 that are likely to have a significant impact in the world of pension and welfare employee benefits and, in some cases, already have had such an impact. The issues addressed by the Supreme Court are wide ranging and are both substantive and procedural.

They include same sex marriage benefits, welfare plan reimbursement provisions, statute of limitations and class certification. Looking ahead into 2014, we see that the Supreme Court has already agreed to decide several significant benefits issues, including issues pertaining to Employee Retirement Income Security Act stock-drop litigation, the so-called "contraceptive mandate" under the Affordable Care Act and whether the Federal Insurance Contributions Act tax applies to reduction in force related severance pay.

2013 Supreme Court Decisions

Section 3 of DOMA Unconstitutional

By now, it is well known that the Supreme Court ruled unconstitutional the section of the Defense of Marriage Act that defined marriage and spouse as excluding same-sex partners on the ground that it violated the Equal Protection Clause of the U.S. Constitution in United States v. Windsor, 133 S. Ct. 2675 (2013).

As a result, same-sex marriages will be recognized for purposes of federal laws, protections and obligations. Since the court's ruling, the Internal Revenue Service and U.S. Department of Labor have both adopted a "place of celebration" rule, meaning that same-sex couple legally married in any jurisdiction will be recognized as spouses for federal tax purposes even if the couple resides in a jurisdiction that does not recognize the validity of their marriage. This rule is welcome news for plan sponsors who may now administer their benefit plans in a uniform manner with regard to covered same- and opposite-sex married couples.

Welfare Plan Reimbursement Clauses

For years, health plan sponsors and administrators had grappled with confusing and inconsistent rulings regarding their right to enforce plan reimbursement provisions in the face of common and state law equitable defenses. The reimbursement provisions typically are designed to enable a plan to recover previously paid medical benefits when the participant receives a recovery from another source, such as a person responsible for a participant's injury or illness.

In US Airways Inc. v. McCutchen, 133 S.Ct. 1537 (2013), the Supreme Court resolved much of this confusion by ruling that the terms of a plan's reimbursement provision, if clearly written, will trump competing equitable defenses. The court left room for application of equitable defenses, however, as a means to interpret ambiguous plan reimbursement provisions. As a result of the court's ruling, a properly drafted a reimbursement clause should allow a plan to recover the full amount of the medical costs it paid without qualification.

Statute of Limitations

In another case involving an employee welfare plan, the Supreme Court held that a contractual limitations clause that governs the length of the limitations period as well as when it begins is enforceable as long as the limitations period is reasonable and there is no controlling statute to the contrary. Heimeshoff v. Hartford Life & Accident Insurance Co., 134 S.Ct. 604 (2013).

As a result of the court's ruling, employers should consider including in their plans reasonably crafted limitations periods for bringing claims, as well as rules concerning the accrual of claims, and then publishing such provisions in benefit statements and summary plan descriptions. These provisions may prove particularly effective for limiting exposure to claims for pension benefits, which are frequently brought long after participants retire, by which time relevant evidence may no longer be readily retrievable.

Class Certification

The Supreme Court ruled in Comcast Corp. v. Behrend, 133 S.Ct. 1426 (2013) that, in order to obtain class certification, plaintiffs carry the burden of establishing not only that they have proof of classwide liability, but also that their potential damages are tied to their theory of liability and are capable of classwide proof.

Although Comcast was an antitrust lawsuit, it is likely to have an impact on class certification proceedings across all disciplines, including claims under ERISA. At a minimum, the Supreme Court's ruling should make considerations of damages a component of the class certification analysis. This alone represents a considerable departure from the approaches of many lower courts, which have tended to focus exclusively on liability issues when addressing a class certification motion.

Supreme Court Decisions Expected by June 2014

Presumption of Prudence in Employer Stock Litigation

Over the past two decades, participants in 401(k) plans and employee stock ownership plans ("ESOPs") have increased the frequency in which they have mounted challenges to plan fiduciaries' decisions to continue allowing investment in an employer stock fund.

The complaints in these cases generally contain two principle claims: (1) a claim that the plan fiduciaries breached their fiduciary duties by maintaining an employer stock fund when was imprudent to do so, and (2) making misrepresentations and/or failing to disclose material information about the risks associated with investment in an employer stock fund.

With respect to the first claim, all circuit courts to have considered the issue, have applied a presumption of prudence with respect to the decision to continue allowing investment in an employer stock fund. The circuit courts are not, however, in agreement as to the types of allegations needed to rebut the presumption and whether the presumption should be applied at the motion to dismiss stage. The Supreme Court recently agreed to address the latter issue, and it is expected that, in so doing, it will conduct a more fulsome evaluation of the presumption itself. Fifth Third Bancorp v. Dudenhoeffer (U.S. No. 12-751).

Contraceptive Mandate

The Supreme Court agreed to review two of the numerous lawsuits challenging the Affordable Care Act's requirement that group health plans and insurers cover, without cost-sharing, contraceptives and/or abortifacients.

The plaintiffs in these suits are secular, for-profit corporations and their owners, who assert that being forced to comply with the contraceptive mandate would violate both their First Amendment religious rights and the Religious Freedoms Restoration Act.

All courts addressing the various contraceptive mandate suits have struggled with the issue. Over the past year, a circuit split developed: some circuits adopted a "pass through" theory that allowed corporations to assert the free exercise rights of their owners and held that the contraceptive mandate places a substantial burden on their religious freedoms.

Other circuits, in contrast, have rejected the argument that secular, for-profit corporations are protected by the free exercise clause and have held that the owners are not burdened by the mandate, since it is the corporation, not the owners, who would be funding this coverage. Sebelius v. Hobby Lobby Stores and Conestoga Wood Specialties Corp. v. Sebelius (U.S. No. 13-354, 13-356).

Applicability of FICA to RIF-Related Severance Pay

It is anticipated that the Supreme Court will once and for all put to rest the question of whether severance payments made to former employees pursuant to an involuntary reduction-in-force are wages for the purposes of Social Security and Medicare withholding under FICA. United States v. Quality Stores Inc. (U.S. No. 12-1408).

The issue has become particularly relevant given the increase in workforce reductions over the past several years. The Supreme Court's decision to consider the issue provides a reminder to employers to consider filing protective refund claims to preserve their rights and prevent the statute of limitations from expiring on tax refund claims for still open years.

Conclusion

While it will take time for the full impact of last year's Supreme Court's decisions to be seen, some of the court's rulings should provide plan sponsors and fiduciaries with additional mechanisms for prosecuting and defending lawsuits on behalf of plans. Depending on the outcome of some of this year's rulings, however, we could see an expansion of claims and legal exposure in certain areas.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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