Monitoring Service Providers Now May Save Trouble Later
A recent case from the Second Circuit demonstrates the importance of monitoring service providers.
Katherine Sullivan was a former Verizon employee who earned approximately $18,600 per year during her employment. Sullivan's former employment entitled her to a group life insurance benefit based on her annual salary. However, Verizon's third-party benefits administrator, Aon Hewitt ("Aon"), improperly coded Sullivan's annual income of $18,600 as her weekly salary. This coding error caused Aon to repeatedly (but incorrectly) represent to Sullivan that she was eligible for a life insurance policy that provided up to $679,700 in life insurance coverage. Sullivan received a number of mailings from Aon representing this benefit. Sullivan also called the Verizon Benefits Center, where Aon representatives again confirmed the coverage amounts.
However, when Sullivan died, her daughter, Kristine Sullivan-Mestecky, received only $11,400 as the beneficiary of her mother's policy. Sullivan-Mestecky disputed the payment amount, but Verizon informed her that there had been an error in calculating the value of her mother's life insurance policy. Sullivan-Mestecky filed suit, alleging Verizon breached its fiduciary duties. The district court dismissed her claims, and Sullivan-Mestecky appealed. The Second Circuit held that Verizon failed to act with the "care, skill, prudence, and diligence" required from ERISA fiduciaries. As plan sponsor, Verizon was bound by its fiduciary duty to properly administer the plan and was ultimately responsible for assessing Sullivan's eligibility and enrollment. Aon was grossly negligent when it made repeated oral and written misrepresentations to Sullivan as to her benefits under the plan, but Verizon arranged for Aon to communicate with participants like Sullivan on its behalf. Therefore, Verizon could not "hide behind [Aon's] actions to evade liability for the fiduciary breach that occurred." Even though Aon was acting as a ministerial agent, the court imputed Aon's gross negligence to Verizon. The court also held that Verizon's fiduciary breach justified equitable and monetary relief.
This ruling provides a reminder that plan sponsors should monitor and review the work performed by their service providers as part of their fiduciary duties to plan participants, as the plan sponsor is ultimately responsible for the proper administration of its plan. Sullivan-Mestecky v. Verizon Communications, Inc., No. 18-1591 (2d Cir. 2020)
Revisiting Leave Sharing and Leave Donation Programs in the Time of COVID
At some point this year, many employers found themselves deciding whether to furlough large swaths of employees. That decision often involved discussing ways the company could continue to provide support to employees while they were furloughed. Two methods of support we found ourselves frequently discussing with clients were leave-sharing and leave-donation programs. Leave-sharing programs allow employees to donate accrued paid time off to a pool that can be used by employees who have no available leave. Leave-donation programs allow employees to forgo accrued paid time off in exchange for cash payments that their employers make to charitable organizations.
From a tax perspective, the general rule is that leave donated to either type of program is taxable to the donor (i.e., included in the employee's Form W 2 wages). However, the Internal Revenue Service ("IRS") recognizes three important exceptions to this default tax treatment. These exceptions apply to leave-sharing programs for "medical emergencies" and "major disasters" and to leave-donation programs when the IRS recognizes a temporary moratorium on the taxation of donations. Each type of program has different requirements that, if followed, take the tax burden off the leave donors.
Leave Sharing: What Is a "Medical Emergency"?
In a Private Letter Ruling from 1990, the employer's leave-sharing program defined a "medical emergency" as a medical condition of the employee or the employee's family member that will require the employee's prolonged absence from work. As a result of that prolonged absence and the employee's exhaustion of all available paid leave (other than through the leave-sharing program), the employee will experience a substantial loss of income. This definition has since consistently been adopted by employers offering medical emergency leave-sharing programs.
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