Compliance June 20, 2024

Kohler Agrees to Settle ERISA Lawsuit Against DB Plan

Kohler Co., the Kohler Co. Pension Plan and pension plan beneficiary plaintiffs request the court’s approval of the settlement.

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Kohler Co. has reached a $2.45 million preliminary settlement with a proposed class of vested Kohler Co. Pension Plan participants to resolve a lawsuit that had claimed their benefits were shortchanged. 

The named vested participant plaintiffs in the litigation are Danny Holloway, James Kohlhagen, Jeffrey Leffin and Keith Pfister.  The lawsuit is Holloway et al v. Kohler Co et al. The case was heard in U.S. District Court for the Eastern District of Wisconsin Milwaukee.

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They claimed Kohler’s pension plan shortchanged participants through the use of outdated mortality tables in violation of the Employee Retirement Income Security Act.

Their attorneys argue that the proposed settlement merits court approval because the agreement is fair, reasonable and adequate.

“The settlement will increase the amount that class members receive in their monthly pension checks—a benefit that will continue for the rest of their lives and the lives of their beneficiaries,” argued plaintiff’s attorneys, in the unopposed motion seeking preliminary approval of the settlement.  

Complainants this week requested the court approve the settlement; preliminarily certify the settlement class; approve the proposed form and method of notice to the class; and schedule a hearing for the court to consider final approval of the settlement.

The Kohler Co. Pension Plan held about $1.726 billion in assets under administration for 21,945 participants, as of December 2021. Kohler Co.’s plan records indicate the settlement will apply to approximately 500 class members.

In exchange for the increase to their monthly benefits, plaintiffs and each class members “shall be deemed to forever release and discharge [Kohler Co. and Kohler Co. Pension Plan] from any and all claims arising on or before the preliminary approval date that were brought, or could have been brought, arising out of, or relating to, the provisions of the plan applicable in the calculation of the class member’s benefit,” states the motion for order of preliminary approval of class settlement.

The proposed class of complainants alleged Kohler’s pension calculated their joint survivor annuity benefits—and those of other class members—using outdated mortality and interest rate assumptions that caused their monthly benefit to be less than an “actuarially equivalent” amount, according to the original complaint. 

“The present values of class members’ JSA benefits were less than the present values of the [single life annuity’s] they could have selected,” wrote attorneys for the accusers. “Plaintiffs allege the present values of the two benefit types would have been equal had defendants used mortality and interest rate assumptions that were reasonable as of the date Class Members began to receive their benefits.”

Settlement Terms

The $2.45 million net settlement amount is less any amounts the court awards as attorney’s fees. Expenses and a case contribution award will be divided among class members in proportion to the total value of their past and future pension benefits payments.

Per the settlement terms, the proposed class is a non-opt-out class.

The class is defined as applying to all participants and spouse beneficiaries entitled to benefits under the Kohler Co. Pension Plan who began receiving either a joint and survivor annuity, qualified optional survivor annuity, or qualified preretirement survivor annuity, on or after September 19, 2017 but before January 1, 2021, whose benefits had a present value that was less than the present value of the SLA they were offered using the applicable Treasury Assumptions as of each participant’s benefit commencement date.

Excluded from the class are defendants and any individuals who are subsequently to be determined to be fiduciaries of the plan.

Within 60 days after final approval of the settlement, Kohler will amend the plan to provide that each class member is entitled to an increased monthly payment as of July 21, 2024.

Monthly benefit increases except for deceased class members will be calculated as follows:

  • The monthly benefit increase is the settlement percentage multiplied by the sum of the adjusted past benefit and the current monthly benefit.
  • The settlement percentage is calculated by dividing the net settlement amount by the sum of the past benefit amounts of all deceased class members, the present value as of August 1, 2024, of the adjusted past benefits for all class members and/or associated participants (other than deceased class members), and the present value of all future benefit payments owed to class members (before the increase contemplated by this Agreement) as of August 1, 2024.

Class members will begin receiving an increased benefit by the first day of the first calendar month that is at least 120 days after the final approval of the settlement.  

Under the settlement, attorneys request an award of $730,000—up to 30% of the present value of in the settlement—in attorney’s fees and expenses and intend to request a case contribution award to each plaintiff of up $2,500 to each member, subject to court approval.  

Weighing approval of a settlement, federal courts operate under a standard: measuring costs, risks and delay of trial and appeal against the effectiveness of a proposed method of distributing a remedy to complainants.

 

Case History

The initial complaint was filed before U.S. District Court for the Eastern District of Wisconsin Milwaukee, in September 2023. The active complaint was filed in January.

The proposed class is represented by attorneys with law firm Siri & Glimstad LLP; Izard Kindall & Raabe LLP; and Motley Rice LLC. Kohler Co. is represented by attorneys with law firm Alston & Bird LLP and Reinhart Boerner Van Deuren SC.

Representatives of attorneys for Kohler did not respond to a request for comment nor did representatives of attorneys for the proposed class of plaintiffs. Kohler did not respond to a request for comment.

Compliance June 20, 2024

PSNC 2024: Applying a Fiduciary Standard to Health Care

With new fiduciary standards in place under the Consolidated Appropriations Act, it is important for plan sponsors to be diligent when managing their health care plans. 

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A federal law enacted three years ago is adding new fiduciary responsibilities for plan sponsors as that law and other federal regulations are driving risks and opportunities around health plans. 

Under the Consolidated Appropriations Act of 2021, plan sponsors are required to attest that their fees for health care plans are fair and reasonable for the services provided. 

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As a result, it is vital that plan sponsors apply a fiduciary process, as required by the Employee Retirement Income Security Act, for their health care plans, according to Jamie Greenleaf and Barbara Delaney, who spoke at the PLANSPONSOR National Conference in Chicago earlier this month. 

After asking the room of plan sponsors whether they had a formal committee set up for their health and welfare plans, only three people raised their hands. Delaney, principal and founder of SS/RBA, a division of Hub International, said this is a widespread issue, and that more attention needs to be paid to applying a fiduciary standard to health care plans. 

“HR and finance need to be working together,” Delaney said. “If you’re a fully insured plan, you’re running an insurance company, whether you know it or not, and not understanding the rules is not by default, it’s by design.” 

Delaney also noted that while there has been a lot of talk about offering financial wellness tools to participants, she argued that financial wellness cannot be improved without first taking care of the health care system. 

“If you look at open enrollment every year, … it’s not helping people because they don’t know which health plan to pick,” Delaney said. “[We need to] build a financial wellness system that takes into account how to pick your [health care] program because I know plan sponsors spend a lot of time on this, but participants just don’t get it.” 

Greenleaf, senior vice president of OneDigital Retirement + Wealth, said there are three pieces of legislation impacting the health care industry of which plan sponsors should be aware. 

The first law has to do with hospital price transparency, which essentially states that patients should be able to go the hospital and know exactly what they are going to pay for, what a procedure will cost, the cost of staying at the hospital, etc. Patients also need to have the ability to shop for medical care based on prices. 

“If a hospital is out of compliance, there’s a penalty associated with that,” Greenleaf said. “As of today, … about 20% of hospitals are in compliance with the regulation, and there’s been about $2 million in fines.” 

Transparency 

The federal Transparency in Coverage rule is something that plan sponsors should be aware of, Greenleaf said. The regulation was rolled out over a three-year period and is now in full effect, as of January 1. It requires plan sponsors, regardless of size and if they are fully insured or self-insured, to provide employees with the ability to shop for care. 

“When I walk into a doctor’s office and the doctor says to me, ‘you need an MRI,’ I should be able to pull out my phone and look at all the MRI [prices] across my region for in-network and out-of-network and be able to shop for that cost or gap,” Greenleaf said.  

Greenleaf emphasized the importance of this regulation, explaining that if a company employs 100 people, for example, and covers 120 members, the employer will be charged $100 per member each day they are out of compliance. This is a massive expense, she said, also noting that a lot of litigation has been occurring around this issue, most recently with the Mayo Clinic.  

Gag Clauses 

Lastly, under the Consolidated Appropriations Act, employers have to attest that they have removed gag clauses from all of their covered service providers’ contracts. A gag clause is anything that prohibits a plan sponsor from accessing information about the cost and quality of the health care plan.  

Greenleaf said gag clause removal is important because it gives plan sponsors the ability to run a proper fiduciary process. Another important aspect of the CAA is that plan sponsors need to understand who they are paying and how much they are paying.  

“All of your covered service providers—your brokers, your third-party administrators, your [pharmacy benefit managers], your carriers—have to disclose both direct compensation [and] indirect compensation,” Greenleaf said.  

She explained that direct compensation is likely compensation that is explicitly written in a contract with a provider. Indirect compensation is often something sponsors may not be aware of and can include things like retention bonuses, or if a sponsor has a PBM, that PBM might be receiving compensation per prescription based on participants’ usage.  

For example, in a class-action lawsuit against Johnson & Johnson earlier this year, the company was accused of failing to exercise prudence in selecting its PBM and agreeing to undesirable contact terms. Specifically, Greenleaf said a consultant was allegedly getting paid by the PBM $6.50 for each prescription that every employee had.  

Benchmarking 

Under ERISA section 408(b)(2), just like a plan sponsor would do in the retirement space, a fiduciary must deem the compensation they are paying to advisers and providers to be reasonable. Similar to how a sponsor benchmarks fees in a 401(k) plan, Greenleaf said a sponsor must do the same with their health care plan.  

“This is not just [benchmarking] your broker, this is everybody that touches your plan [or] that is expected to make $1,000 or more on that plan,” she said. “There are lots of games being played in this space around compensation disclosures.” 

Delaney emphasized the importance of conducting a request for proposals for new PBMs. 

“If you’re using any of the big three PBMs, like CVS, which control about 80% of the marketplace, you’re probably having challenges getting the information [you need],” Delaney said. “Make sure you’ve carved out your Rx program from your medical and that you don’t have the same carrier overseeing both … You really need an expert in the kind of contract language you want to have in there.” 

In 2023, nearly 80% of all prescription claims were processed by three companies: CVS Caremark, the Express Scripts business of Cigna, and the Optum Rx business of UnitedHealth Group, according to data from the Drug Channels Institute. 

Best Practices 

With more lawsuits expected, Greenleaf said it is in sponsors’ best interest to establish a fiduciary committee for their health plan, if they have not already, because this helps establish a process around gathering information and deeming costs reasonable. She said it is important to make sure that fiduciary insurance covers the health care side of the plan, not just retirement, because some polices do and others do not.  

“Forming the committee is important because with the J&J [lawsuit], they didn’t have a committee [and] by default, they named individuals in the lawsuit, and they were all HR people,” Greenleaf said.” 

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