SEPTEMBER 2009

VOLUME 64 • NUMBER 3

Legal Landmines for Employee Benefit PlanSponsors During Bad Economic Times

James P. Baker and David M. Abbey

The Next Evolution of 401(k) PlansBill McDermott

FeatureThe Pension Plan Paradigm Has Shifted...Should You?

Larry Karle

• FEATURE ARTICLES

Focus On... 401(k) PlansEmployers: Time to Take Stock of Your 401(k) Plans

Richard E. Baltz

Special ReportA Plan Administrator/Sponsor's Guide to Diminishingthe Impact of a Conflict of Interest

Susan Reiland

Employee BenefitPlan Review

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FROM THE EDITORSteven A. Meyerowitz

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Focus On... 401 (K) PLANS

Legal Landmines for Employee Benefit PlanSponsors During Bad Economic TImesJAMES P. BAKER AND DAVID M. ABBEY

reaking Up Is Hard to Do" isnot only the name of a popularsong from the 1960s, it alsodescribes the feelings of most

employers who, because of competition, busi­ness costs or our current bad economy mustreduce the size of their employment budget. Bythe time an employer has to "downsize," theeconomic factors driving that decision havealready done their damage. The question formanagement is ordinarily not whether a reduc­tion in force or a cut in employee benefits isnecessary but, rather, how to do it. Navigatingaround employee benefit landmines is diffi­cult even in good economic times. It has nowbecome a truly perilous undertaking due to thedramatic declines in retirement plan asset val­ues and the government's increasing scrutiny ofemployee benefit arrangements.

DRAMATIC DECLINE

IN RETIREMENT PLAN ASSETS

How bad is it? By the end of calendar 2008,old fashioned pension plans (technically called"defined benefit plans" by those practicingin this area) for Fortune 500 companies hadaccumulated $1.4 trillion in liabilities and hadjust $1.1 trillion in assets. Just one year earlierthese same Fortune 500 plans had a $63 bil­lion surplus. 2008's stock market decline sim­ply decimated plan asset values. For example,the average defined benefit plan experienceda 24 percent decline in the value of its assetsduring 2008. At the end of calendar 2007, 46percent of pension plans had funding levelsof between 90 percent and 110 percent andonly five percent of plans were funded below70 percent. Today it is estimated that only fivepercent of pension plans are funded above 90percent. Over 60 percent of pension plans havefunding levels below 70 percent. 401(k) planshave fared no better. By the end of calendar2008 the average 401(k) plan account balancewas down by 26 percent. Sponsors of definedbenefit plans are thus reeling from a doublewhammy-large negative investment resultsoccurring at the same time the federal govern­ment is mandating increased plan funding.

EMPLOYEE BENEFIT PLAN REVIEW

UNFAVORABLE DEMOGRAPHICS

In the overall U.S. economy, the ratio ofactive workers to retired workers has beenplummeting for many years-it now standsat about three active employers to one retireecompared to 16 active workers to each retireein 1950. At some companies like Ford andChrysler, the ratio of active workers to retireeshas fallen from six to one in 1950 to one toone now. At GM there is now only one activeemployee for every two GM retirees.

Beyond demographic factors, the prob-lem is compounded by the fact that the U.S.economy is shrinking. In May 2008, the U.S.unemployment rate stood at 5.5 percent. It isnow officially 8.9 percent. Since the recessionbegan in December 2007, over five million jobshave been lost. The Department of Labor esti­mates that as of April 2009 almost 14 millionAmericans are out of work.

INCREASED GOVERNMENT SCRUTINY

The Pension Protection Act of 2007 (PPA)added a series of new funding requirementsfor defined benefit plan sponsors. Generally,the legislation is aimed at requiring all definedbenefit plans to achieve 100 percent fundingwithin the next seven years.! PPA's new fund­ing mandates include a requirement for everydefined benefit plan to now fund the pres-ent value of the plans' accrued benefits andamortize any unfunded liabilities over a sevenyear period, using legislated actuarial assump­tions.2 The PPA also requires all defined benefitplan losses to be amortized over seven years.Defined benefit plan administrators must alsonow provide a mandatory annual notice toplan participants, labor organizations and thePBGC generally describing the plan's currentfunding level. For calendar year defined benefitplans, the first annual funding notice was tobe issued by April 30, 2009.3 Asset smoothingtechniques which had not been restricted bylaw prior to the PPA, now cannot exceed 24months. If a defined benefit plan's funding levelfalls below 60 percent, no lump sum distribu­tions will be allowed.4 While there has been astorm of protest from plan sponsors about the

SEPTEMBER 2009 11

• Focus On.•.

wisdom of implementing new fund­ing requirements during a severerecession, those protests have fallenon deaf ears. Many employers face2009 PPA funding obligations thatare multiple times their 2008 con­tribution amount. Going into 2009,the PBGC was already carryingan $11 billion deficit and recentlyannounced that it posted a $33.5 bil­lion deficit for the first half of fiscalyear 2009, the largest in the agency's35 year history.

The PPA added new provisionsto ERISA aimed at making custom­ized investment advice more readilyavailable to 401(k) plan participants.As added to ERISA, new Sections408(b)(14) and 408(g) provide anexemption from ERISA's prohibitedtransaction rules for the provisionof investment advice, the acquisitionof securities pursuant to the invest­ment advice, and the receipt of feesin connection with the provision ofparticipant-level investment advice toa participant directed plan.

The day after President Obamawas inaugurated, on January 21,2009, the Department of Laborpublished final investment adviceregulations that included rulesimplementing Section 408(b)(14)and a class exemption coveringcertain transactions outside thescope of the statute and regula­tions. Shortly thereafter, in responseto a memorandum issued by RahmEmmanuel, Obama's Chief of Staff,the Department of Labor opened anew comment period inviting publiccomments on any substantive issuesraised by the regulation, and delayedthe regulation's effective date untilMay 22, 2009. On May 22, 2009,the Department further delayed thefinal regulations until November 18,2009.

This latest delay follows theintroduction by RepresentativeRob Andrews (D-NJ), chair ofthe Health, Employment, Labor,and Pensions Subcommittee of theHouse Committee on Education andLabor, of the "Conflicted InvestmentAdvice Prohibition Act of 2009."

12 SEPTEMBER 2009

Andrews' bill would eliminateSection 408(g) of ERISA and insteadrequire that any investment adviserhired to provide investment adviceeither to a participant-directedplan or to its participants mustqualify as an "independent invest­ment adviser." The bill would retainthe current structure that permitsadvisory programs to be providedeither through a fee-based approachor through the use of a computermodel. However, the bill imposesnew restrictions on these programsthat go above and beyond currentrules.

Other recently introduced leg­islation is focused on increasingthe transparency of fees associatedwith 401(k) Plans. On April 21,2009, George Miller (D-CA), chairof the House Education and LaborCommittee (HELP Committee), rein­troduced the "401(k) Fair Disclosurefor Retirement Security Act of2009," which is nearly identical tothe version of the legislation that wasapproved by the HELP Committee inApril 2008. According to ChairmanMiller, among other things, theproposal would (1) require serviceprovider disclosures to employersbroken into four categories (planadministration and recordkeeping,transaction fees, investment manage­ment fees, and other fees) includingdisclosure of potential conflicts ofinterest, (2) require standardizeddisclosures to participants regard-ing investment options, investmentoption performance, and fees associ­ated with each investment option,and (3) condition limited employerliability for participant directedinvestments under Section 404(c)of ERISA on the use of at least oneindex fund in a plan's investmentlineup.

Prior to the reintroduction ofRepresentative Miller's proposal,Senators Tom Harkin (D-IA) andHerb Kohl (D-WI) reintroduced theirfee disclosure legislation on February10, 2009, "The HarkinIKohl DefinedContribution Fee Disclosure Act of2009." We also anticipate that House

Ways and Means Committee mem­ber Richard Neal (D-MA) will rein­troduce his fee disclosure proposalfrom 2008 sometime in the nearfuture.

Meanwhile the 2009 amend­ments to COBRA have added a newlevel of complexity to an alreadycomplicated law regulating grouphealth plans. In a nutshell, the 2009COBRA amendments allow employ­ees who lose their job throughno fault of their own betweenSeptember 1,2008 and December31,2009, to have the federal gov­ernment pay for 65 percent of theirCOBRA premiums (the employerreceives a payroll tax credit equalto 65 percent of the COBRA pre­mium). New laws mean new rules,new COBRA notices and new unan­swered questions.

GOOD TIMES FOR ERISAPLAINTIFFS LAWYERS

With the rapid decline in the U.S.economy has come an upsurge inemployee benefit related lawsuits.For example, when Caterpillar andAlcoa announced reductions to theirretiree medical benefit plans during2008 they were immediately hit withclass action lawsuits. To no surprise,benefit reductions are very unpopu­lar with retirees. While employershave generally convinced courts theyare allowed to share costs with sala­ried retirees under ERISA regulatedretiree medical plans,S these samearguments have not fared as well inconnection with retiree medical bene­fits covered under a union contract.6

To make matters worse for employ­ers trying to maneuver through themany obstacles associated with adecision to reduce benefits, the cir­cuit courts of appeals have patentlydifferent opinions about when collec­tively bargained retiree medical planscan be changed.

The outcome of a retiree medi­cal lawsuit increasingly depends onthe analysis employed by the courtin considering benefit reductioncases. Retired union members favorthe analysis employed by the Sixth

EMPLOYEE BENEFIT PLAN REVIEW

Circuit for a very good reason. Ofthe 12 important retiree medicaldecisions arising under the LaborManagement Relations Act in theSixth Circuit, all 12 found retireemedical benefits were vested.7

While federal courts in Ohio andMichigan appear to favor retirees inthese disputes, the same cannot besaid of the federal courts next doorin Illinois and Wisconsin. Employerscrowd the dockets in Illinois andWisconsin because the SeventhCircuit has ruled retiree medical ben­efits are not vested in eight out of 10published LMRA cases.8

Consequently, where the lawsuitis filed, as opposed to the circum­stances leading to the benefit reduc­tion, will often be the determinativeevent in the outcome of a case.

PARTICIPANTS ARE SUING

PLAN FIDUCIARIES

FOR INVESTING MONEY

IN RISKY COMPANIES

The subprime mortgage crisis hashad a profound effect on retirementplans regulated by the EmployeeRetirement Income Security Act of1974 (ERISA).9 The most obviousexamples are the many lawsuitsfiled by 401(k) Plan Participants atCountrywide, AIG, Lehman Bros.,Bear Stearns, and others alleging thatplan fiduciaries knew or should haveknown it was imprudent to allowemployees to ever invest in the stockof these companies. These new classaction stock drop cases are the off­spring of the debacle at Enron.

What happened at Enron? Theclass action "stock drop" industrywas, of course, born out of Enron'sbad facts. In early 2001, EnronCorporation shares were tradingat $80. Jeff Skilling unexpectedlyresigned as chief executive officerof Enron in August 2001. Enronshares were then trading at $35.Ken Lay, the former chairman ofEnron, returned as the CEO. Enronthereupon stunned Wall Street inOctober 2001 by announcing a $638million loss and a $12 billion write­down. Between September 2001 and

EMPLOYEE BENEFIT PLAN REVIEW

November 2001 the 401(k) plan wasin "lock-down" mode. To facilitatethe transition to a new plan admin­istrator, Enron 401(k) plan partici­pants were not allowed to changeany 401(k) plan investments or tradeEnron stock. During the lockdown,Enron stock collapsed from $34 to$10 per share. It was also duringthis same time period that Ken Laymade a speech in the Enron cafeteriaextolling the virtues of buying Enronstock while he was busily selling allof his own Enron shares. All told,Enron's 401(k) plan participants lostabout $1 billion in their Enron stockinvestments. When the lawsuit ended,the ERISA plaintiffs recovered $442million.

Just as disappointed public share­holders bring federal securities fraudlawsuits when they suffer investmentlosses, so too do ERISA plan partici­pants when they think plan fiducia­ries have done bad things. FollowingEnron, numerous ERISA "stockdrop" cases have been filed based onallegations that plan fiduciaries, likethe Enron 401(k) plan fiduciaries,knew or should have known thatcompany stock was not a prudentretirement plan investment, yet theyallowed participants to accumulate itanyway.

By now the circumstances lead­ing to the filing of one of these stockdrop cases are unfortunately all toofamiliar. An employer includes itsstock as an investment vehicle in thecompany's retirement plan, partici­pants invest heavily in the stock­perhaps because it is the only stockthey are truly familiar with-onlyto be followed sometime later by aprecipitous decline in the share price,leading to the filing of a lawsuit byplan participants, alleging that theplan's fiduciaries knew or shouldhave known that employer stock wasnot a prudent investment option forthe plan. lo

Employers with company stockin their sponsored-retirement plansneed to heed the lessons from Enronand its progeny, especially in thistime of economic upheaval.

401 (K) PLANS

SECURITIES LENDING

PROGRAMS: Is THIS THE

NEXT WAVE OF ERISA

LITIGATION?

BP recently sued Northern Trustalleging Northern Trust breached itsfiduciary duties when it lost 401(k)plan money by lending out securities(held in certain investment funds)and then failed to tell BP about thelosses. It turns out that BP is notalone. Securities lending programsare commonly used by retirementfunds as a means to produce addi­tional income on stock portfolios.A 401(k) trustee is often authorizedto lend stock out to short seller andother borrowers in exchange for cashas collateral. The cash collateral isthen supposedly invested in "safe"investments, such as Treasury billsor money market instruments. Undertypical securities lending agree­ments, the return on the investedcash collateral is split among theretirement fund (for the benefit ofits participants), the trustee, and theborrower of the securities. While thegains are usually small in percent­age terms (because under applicableDepartment of Labor exemptiverelief allowing participation in suchtransactions the collateral is requiredto be invested in low risk invest­ments for short time periods), theycan add up to big dollars over timewhen a large portfolio of securities isinvolved.

Securities lending programs havenot been immune to losses stemmingfrom the recent credit crisis. Whensupposedly reliable investments dropin market value due to the"flight toquality" and liquidity and liquidityneeds, securities lending programshave seen losses for the first time.The losses are realized when thecash collateral is invested in assetsthat drop in value, thus creating adeficiency between the book valueof the cash collateral and the marketvalue of the collateral investments. Itis estimated that billions of dollars oflosses have been sustained recentlyby ERISA regulated plans in securi­ties lending programs.

SEPTEMBER 2009 13

Focus On..•

Similar claims are being broughtby 401(k) plan fiduciaries who allegethat mutual fund trustees runningan index fund, such as an S&P 500index fund, breached their fiduciaryduties by engaging in securities lend­ing. S&P funds that employ securi­ties lending often lag the S&P indexbecause of securities lending lossesdue to investments in subprimemortgage backed securities.

PARTICIPANTS ARE SUING

FORMER INVESTMENT

ADVISORS

Aside from the lawsuits chal­lenging reduction in retiree medicalplans, some retirement plan fidu­ciaries themselves have filed classaction complaints against invest­ment funds who invested ERISAplan money with Bernie Madoff. Forexample, the Pension Fund for theHospital and Healthcare Employeesof Philadelphia filed a class actionERISA lawsuit against Austin CapitalManagement on February 12,2009,alleging that the Austin CapitalManagement Fund violated ERISAby investing money with Madoff.In a February 5, 2009, notice,"Duties of Fiduciaries in Light ofRecent Events Regarding Bernard L.Madoff Investment Securities LLC,"the Department of Labor alertedplan fiduciaries they might need tosue Bernie Madoff and his "feeder"funds to properly discharge theirfiduciary duties.

EMPLOYEE BENEFIT

DISCRIMINATION CLAIMS

"I'll be back," are probablythe three most dreaded words anemployer hears at the end of anexit interview. The bad things thatcan follow these words can rangeform wrongful termination lawsuitsto a baker's dozen of discrimina­tion claims. Faced with shrinkingrevenues, many employers havelittle choice but to reduce expensesand often the most significantexpenses are those associated withthe employee benefit programs. Butspinning off a company to jettison

14 SEPTEMBER 2009

an older workforce with its priceyemployee benefits plans, if doneimproperly, may constitute breachof fiduciary duty under ERISA.llMoreover, rearranging a workforceso as to avoid paying promised bene­fits may violate another provision ofERISA, which prohibits the interfer­ence with the exercise or attainmentof any right to which a person isentitled under a plan or ERISA.12

The Supreme Court's decisionin Intermodal Rail EmployeesAssociation is particularly instruc­tive. There, the employer (Oldco)wanted to maintain a subsidiary's(Oldco Sub's) existing union-ized workforce but jettison costlyemployee benefit plans. Oldcodecided to do this by putting OldcoSub's work out to competitive bid­ding. An unrelated third party(Newco) was the successful bidder.Newco hired Oldco Sub's employees.However, Newco's benefit packagewas less generous than Oldco Sub's.Newco employees then sued Oldco,Oldco Sub, and Newco for cheatingthem out of the better benefits theyhad under Oldco Sub's employeebenefit plans.

While workforce restructuring isoften a necessary practice by com­panies faced with concerns abouttheir financial viability, ERISAmakes it unlawful to "discharge,fine, suspend, expel, discipline, ordiscriminate against a participant orbeneficiary [of an employee benefitplan] ... for the purpose of inter­fering with the attainment of anyright to which such participant maybecome entitled under the plan."13Put simply, an employer is notallowed to manipulate an employee'sterms and conditions of employ­ment if the purpose is to cheat theemployee out of promised employeebenefits. The Ninth Circuit Court ofAppeals had ruled that ERISA § 510protected the retirement benefits ofthe former Oldco Sub employees butdid not protect their rights to health,dental, vision, and other welfare ben­efits. Sandra Day O'Connor, writingfor a unanimous Supreme Court,

disagreed, stating that Congress's useof the word "plan" in Section 510evidenced a congressional intent toprotect an employee's rights to bothretirement and welfare benefits.14

Justice O'Connor explained thatalthough employers may properlyamend, modify, or terminate welfarebenefit plans at any time, this doesnot mean an employer has unlimitedpowers:

An employer may, of course,retain the unfettered rightto alter its promises, butto do so it must follow theformal procedures set forthin the plan.... The formalamendment process would beundermined if section 510 didnot apply because employerscould "informally" amendtheir plans one participantat a time. Thus, the power toamend or abolish a welfarebenefit plan does not includethe power to "discharge, fine,suspend, expel, discipline,or discriminate against" theplan's participants and ben­eficiaries "for the purpose ofinterfering with [their] attain­ment of ... rights" ... underthe plan. IS

TRUTH OR CONSEQUENCES!

Employers sometimes have manymasters and, in the atmosphere ofpotential financial collapse, theymay feel pressure to frame theirexplanations for reducing benefitsin a manner which they believe willbe more palatable to the financialmarkets or to their shareholders.Before falling prey to such an incli­nation, it is important to recognizethat the Supreme Court made it clearin Varity Corporation v. Howe,16that an employer may be subjectto breach of fiduciary duty claimsunder ERISA when it makes mis­leading statements about employeebenefit plans during business reor­ganizations. In Varity, the employerdownsized by what football punditswould describe as a misdirection

EMPLOYEE BENEFIT PLAN REVIEW

play-pretended to do one thingwhen it was actually doing some­thing entirely different.

Here's what happened: Varitytransferred all of its poorly perform­ing businesses into a newly formsubsidiary (Newco). One of the com­pany's primary objectives in formingthe Newco was to rid itself of costlyemployee benefit obligations. 17 Varitypersuaded employees to transfer toNewco by making overly optimisticobservations about Newco's businessoutlook, its likely financial liability,and the security of the employee ben­efit program. The thrust of Varity'sremarks was that the employees'benefits would remain secure if theyvoluntarily transferred to the newsubsidiary. Varity made these repre­sentations, even though it intendedto reduce the employee benefitsat Newco in the near future. IS

Moreover, Varity knew that therepresentations it had made to theemployees were untrue at the timethey were made.19 At the time thenew subsidiary was formed, it wasinsolvent (it had a $46 million nega­tive net worth).20 The new subsidiaryended its first year of operation withan $88 million loss. It ended its sec­ond year of operation in receivership.After Newco fell into bankruptcy,Newco's employees stopped receiv­ing certain welfare benefits, includingtheir rights to retiree medical ben­efits they would have had, had theyremained employed at Varity.21

The Supreme Court held thatVarity was acting in both its capac­ity as an employer and as a planfiduciary when it intentionally mademisrepresentations to its employeesabout the security of their employeebenefits.22 The Supreme Courtexplained: "Reasonable employeescould have thought that Varity wascommunicating with them both inits capacity as employer and in itscapacity as the plan administrator."23Obviously, the Court's use of thesubjective "reasonable belief" stan­dard in evaluating Varity's actionsblurs the distinction between whenan employer is acting as an employer

EMPLOYEE BENEFIT PLAN REVIEW

and when an employer is acting as aplan fiduciary.

Company officers who are alsofiduciaries to employee benefit plansmust be careful to identify whenrepresentations are being made ascorporate officers and when theirrepresentations are being madeas plan fiduciaries. In light of theSupreme Court's holding in Varity, itmay also be advisable for employersto not name the company as the planadministrator or as a fiduciary of itsemployee benefit plans in order tominimize the risk that company com­munications about business activitiesor proposed benefit changes may becharacterized as misleading fiduciarycommunications.

RETIREMENT PLANS AND

RELEASES OF CLAIMS

What steps can an employer taketo minimize the risk of being suedin connection with a reduction in anemployee benefit arrangement? Canan employer require an employee tosign a release of all claims as a con­dition for participation in an earlyretirement plan incentive plan fundedout of the plan's own assets? The U.S.Supreme Court answered, "yes," inLockheed Corp. v. Spink.24 It foundthat Lockheed Corp. did not violateERISA when it amended its pensionplan to provide enhanced early retire­ment benefits on the condition thatthe employees sign a complete releaseof all claims to participate. The courtreasoned that neither the employernor its board of directors, as plansponsors, acted as ERISA fiduciarieswhen they amended the plan. Underthe amended plan, eligible Lockheedemployees were offered increasedpension benefits paid out of surplusplan assets.

A class of retirees sued, challeng­ing the early retirement plans, par­ticularly with regard to the featurethat benefits were available only toemployees who signed a completerelease of all employment-relatedclaims. They contended these actswere breaches of ERISA's require­ments that plan assets be used

401 (K) PLANS

exclusively for the purpose of pro­viding benefits and violated fiduciaryobligations. In particular, the partici­pants argued that the amendments,which offered increased benefits inexchange for a release of employ­ment, constituted a use of planassets to "purchase" a significantbenefit for Lockheed and was notin the interests of participants andbeneficiaries.

The Supreme Court disagreed,ruling that legitimate benefits thata plan sponsor may receive fromthe operation of a pension plan areattracting and retaining employ-ees, paying deferred compensa-tion, settling or avoiding strikes,providing increased compensationwithout increasing wages, decreas­ing employee turnover, and reduc­ing the likelihood of lawsuits byencouraging employees who wouldotherwise have been laid off todepart voluntarily. The court con­cluded that obtaining waivers ofemployment-related claims cannot bedistinguished from these legitimatepurposes because each involves, atbottom, a quid pro quo between theplan sponsor and the participant;that is, the employer promises to payincreased benefits in exchange forthe performance of some conditionby the employee. The Supreme Courtobserved that an employer can askan employee to continue to workfor the employer, to cross a picketline, or to retire early. The execu­tion of a release of claims againstthe employer is thus functionally nodifferent and, like these other condi­tions, it is an act that the employeeperforms for the employer in returnfor benefits.

PARTIAL PLAN

TERMINATIONS?

Tough economic times, sometimesforce employers to significantlyreduce their workforces. One aspectof reduction in force that is oftenoverlooked, is the potential impactof the reduction in force on theemployer's qualified retirement plans.A hidden and potentially costly

SEPTEMBER 2009 15

II

I

IiiI:I.il

:r,

I

~'

• Focus On...

consequence of a significant reduc­tion in force, or a series of reductionsin force is that the employer's taxqualified retirement plan may experi­ence a "partial termination."25

The law requires all affectedretirement plan participants be 100percent vested in their account bal­ances upon the date of a partialplan termination. A 401(k) Planparticipant's elective deferrals are, ofcourse, always 100 percent vested.Employer contributions, however,are not required to be fully vested,and are usually subject to a vestingschedule. Upon a full or a partialretirement plan termination, theplan's vesting schedule is disregarded.Instead all matching contributionsor any other employer contributionsto the retirement plan immediatelybecome 100 percent vested for allaffected participants.

Whether a partial terminationoccurs depends on the facts and cir­cumstances of each case. Generally,a partial termination is deemed tooccur when an employer-initiatedaction results in a workforce reduc­tion of at least 20 percent.26 Indetermining whether a partial plantermination has occurred, the IRSand the Courts have focused on thefollowing four factors:

1. The percentage of employeesaffected;

2. The time period during whichthe terminations occurred;

3. The presence of a corporateevent (such as a merger or adivestiture); and

4. Evidence of good faith on thepart of the employer.

To determine whether the 20percent threshold amount has beenmet, the IRS requires plans sponsorsto take into account all terminatedparticipants unless the plan spon­sor can show that the employmentterminations were voluntary, forcause, on account of death, dis­ability or retirement. Accordingto the IRS, both vested as well asnon-vested participants are to be

16 SEPTEMBER 2009

taken into account in calculatingthe 20 percent number. However,in Matz v. Household InternationalTax Reduction Investment Plan,27the Seventh Circuit held that onlynonvested participants needed to becounted in determining whether apartial termination occurred.

What time period is to be lookedat to determine if the 20 percentthreshold is met? We do not know.Again, it is a facts and circum­stances test.28 The IRS indicates thata plan sponsor should aggregateall employer initiated terminationsduring a rolling two-year period,unless the employer can establishthe employment terminations wereunrelated.

Because retirement plan partici­pants must be 100 percent vested intheir employer contribution accountsas a consequence of a partial ter­mination, employers must carefullyexamine the potential impact ofthe partial termination rules beforeimplementing a reduction in force,business merger or divesture, siteclosing, or adopting a plan amend­ment that excludes a group ofemployees from plan participation.

CONCLUSION

As the economic outlook remainschallenging, many employers havelittle choice but to face the difficultdecision to reduce employee ben­efit programs and, in some cases,reduce their workforce. Under suchexceptional circumstances, employ­ers are sometimes prone to makingdecisions without full considerationof the employee benefit landminesto which they are easily susceptible.The wrong decision can actually addto the employer's financial burden.As a result, before any workforcereduction is contemplated or changeis made to an employee benefitprogram, an assessment should bemade as to what was promised, andwhether what was promised canbe changed. Did the plan sponsorreserve the right to amend, modify,or terminate the plan? What are thepotholes in reducing an employee

benefit arrangement? Has the likeli­hood of lawsuits and a decline inmorale been considered? A thought­ful and deliberate approach to theseimportant decisions is the only truesafe course. 0

NOTES1. IRC S430.2. rd.3. U.S. Department of Labor FAB 2009-01.4. IRC S 436(d).5. See, e.g., Sprague v. General Motors, 133 F.3d

388,400 (6th Cir. 1998) (en bane).6. UAW v. Yard-Man, 716 F.2d 1476, 1479-1480

(6th Cir. 1983).7. Noe v. Polyone Corp., 520 F.3d 548 (6th

Cir. 2008); Yolton v. El Paso Tenn. PipelineCo., 435 F.3d 571 (6th Cir. 2006); McCoyv. Meridian Auto. Sys., Inc., 390 F.3d 417(6th Cil: 2004); Maurer v. Joy Techs., Inc.,212 F.3d 907 (6th Cir. 2000); UAW v. BVRLiquidating, 190 F.3d 768 (6th Cir. 1999);Golden v. Kelsey-Hayes Co., 73 F.3d 648 (6thCit: 1996); Armistead v. Vernitron Corp., 944F.2d 1287 (6th Cir. 1991); Smith v. ABS Indus.,Inc., 890 F.2d 841 (6th Cir. 1989); Weimer v.Kurz-Kasch, Inc., 773 F.2d 669 (6th Cir. 1985);Policy v. Powell Pressed Steel Inc., 770 F.2d609 (6rh Cir. 1985); UAW Cadillac v. MalleableIron Co., 728 F.2d 807 (6th Cir. 1984); UAW v.Yard-Man, 716 F.2d 1476 (6th Cir. 1983).

8. See Barnett v. Arneren Corp., 436 F.3d 830 (7thCir. 2006); Cherry v. Auburn Gear, Inc., 441F.3d 476 (7th Cir. 2006); Int'l Union, UAW ofAm. v. Rockford Powertrain, Inc., 350 F.3d 698(7th Cir. 2003); Rossetto v. Pabst Brewing Co.,217 F.3d 539 (7th Cir. 2000); Pabsr BrewingCo. v. Corrao, 161 F.3d 434 (7th Cir. 1998);Dieht v. Twin Disc., Inc., 102 F.3d 301 (7thCir. 1996) (vested); Murphy v. Keystone Steel& Wire Co., 61 F.3d 560 (7th Cir. 1995);Bidlack v. Wheelabrator Corp., 993 F.2d 603(7th Cir. 1993) (potentially vested); Senn v.United Dominion Indus., 951 F.2d 806 (7thCir. 1992); Ryan v. Chromalloy Am. Corp., 877F.2d 598 (7th Cir. 1989).

9. 29 U.S.C. S 1001, et seq.10. See, e.g., In re WorldCom, Inc., 263 F. Supp. 2d

745 (S.D.N.Y. 2003); Rankin v. Rots (Kmart);278 F. Supp. 2d 853, 875-877 (E.D. Mich.2003); In re Dynegy Inc. ERISA Litigation, 309F. Supp. 2d 861 (S.D. Tex. 2004); In re EnronCorp. Securities, Derivative & ERISA Litig.,284 F. Supp. 2d 511, 601 (S.D. Tex. 2003).

11. See, e.g., Varity Corp. v. Howe, 517 U.S. 882(1996); Lessarol v. Applied Risk Management,MMI Companies, 307 F.3d 1020, 1026 (9thCir.2000).

12. ERISA S 510, 29 U.S.C. S 1140. SeeIntermodal Rail Employees Association v.Atchison, Topeka & Santa Fe Railroad Co.,520 U.S. 510, 117 S. Ct. 1513 (1997).

13. ERISA S 510,29 U.S.c. S 1140.14. 117 S. Ct. at 1515.15. 117 S. Ct. at 1516. The Supreme Court

remanded to the Ninth Circuit the issue ofwhether or not section 510 protects partici­pants from interference with "attaining" theirwelfare plan coverage:

EMPLOYEE BENEFIT PLAN REVIEW

Respondents argue that ... an employee whois eligible to receive benefits under an ERISAwelfare benefits plan has already "attained" her"rights" under the plan, so that any subsequentactions taken by an employer cannot, by defini­tion, "interfere" with the "attainment" of ...rights under the plan. According to respond­ents, petitioners were eligible to receive welfarebenefits [at Oldco Sub] at the time they weredischarged, so they cannot state a claim undersection 510.117 S. Ct. at 1516-1517.

16. 516 U.S. 489, 116 S. Ct. 1065 (1996).17. 116 S. Ct. at 1068.18. 116 S. Ct. at 1069.19. Id. at 1071.

EMPLOYEE BENEFIT PLAN REVIEW

20. Id. at 1072.21. Id. at 1069.22. Id. at 1071-1074.23. 116 S. Ct. at 1073.24. 517 U.S. 882, 116 S. Ct. 1783 (1996).25. IRC S411(d)(3).26. See Revenue Ruling 2007-43.27. 227 Fed.3d 971 (7th Cir. 2000).28. Matz, supra.

James P. Baker is a partner in the SanFrancisco office of Jones Day and co­

chair of the finn's Employee Benefits &Executive Compensation Practice. His

401 (K) PLANS

practice focuses on ERISA litigation andin providing practical advice concerning

ERISA and other laws regulatingemployee benefit arrangements. He can

be reached at jpbaker@jonesday.com.David M. Abbey is vice president and

managing counsel for T. Rowe PriceGroup, Inc., and its family companies,

where he is responsible for legalmatters associated with the provision

of investment, record keeping, and trustservices to pension plans and other

institutional investors.

SEPTEMBER 2009 17