Compliance December 19, 2011

Owner Trustee May be Held Liable for Denial of Benefits to Ex-Spouse

December 19, 2011 (PLANSPONSOR.com) – A federal court found the owner of a business, as trustee to its retirement plan, may be held liable for a breach of fiduciary duty related to a denial of benefits.
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The U.S. District Court for the Western District of New York ruled Harry Stockwell, Jr.’s awareness of the alleged breach is sufficient to preserve Dawn Smith’s fiduciary duty claim against him.  

The Stockwell Construction Co., Inc. Profit Sharing Plan states Stockwell, Jr., as trustee, had the duty to invest plan assets, so he is clearly a plan fiduciary. The fact Stockwell, Jr. did not have discretion over the payment of the benefits of Smith’s deceased ex-husband’s account does not shield him from liability, the court said.  

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Stockwell, Jr. was aware of the company’s decision not to pay benefits to Smith as correspondence was exchanged between him and the company. which requested information concerning the denial of benefits. This would have put Stockwell, Jr. on notice that Smith’s claim was being denied, and this knowledge, in turn, may establish a breach.  

However, the court found that to the extent Smith brings suit against any defendants in a capacity other than that of administrator or trustee, including in a corporate or individual capacity, those claims must be dismissed.  

The court found TPSI Welfare, LLC, the plan’s third party administrator, was merely communicating the plan administrator’s decision and this is not enough to hold it liable under  a fiduciary breach under the Employee Retirement Income Security Act (ERISA). Smith’s complaint is insufficient to show that TPSI had discretion to make a determination on her benefits. Accordingly, the court ruled TPSI is not a proper defendant in the case.  

According to the court opinion, Smith’s ex-husband was employed by Stockwell Construction Co., Inc, and accrued benefits under the Stockwell Construction Co., Inc. Profit Sharing Plan. He had designated his spouse, Dawn Smith, as the beneficiary of his plan benefits, and did not amend this designation, even after he and Smith divorced.   

After he died on January 31, 2007, Smith made a claim for payment of benefits, but that claim and subsequent appeal were denied. Benefits were instead paid to her ex-husband’s father.   

Smith filed suit under ERISA § 502(a).  

The case is Smith v. Stockwell Construction Co., W.D.N.Y., No. 1:10-CV-00608-WMS.
Compliance December 19, 2011

Senate Passes Short-Term Extension of Payroll Tax Cut

December 19, 2011 (PLANSPONSOR.com) - The U.S. Senate passed legislation Saturday extending a Social Security payroll tax cut and jobless benefits for just two months.
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The House last week passed an extension of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (see House Passed Bill for Payroll Tax Cut Extension), which provides a payroll tax cut for employees, reducing their Social Security tax withholding rate from 6.2% to 4.2% of wages paid (see IRS Releases Pay Withholding Change Guidance).  

The Associated Press (AP) reports that Democratic and GOP leaders opted for the short-term extension of the payroll tax and jobless benefits measure after failing to agree on big enough spending cuts to pay for a full-year renewal. The $33 billion cost of the $1 trillion-plus catchall budget bill that wraps together the day-to-day budgets for 10 Cabinet departments and military operations in Iraq and Afghanistan would be covered by raising fees on new mortgages backed by Fannie Mae and Freddie Mac.  

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The White House says the fee would increase the monthly cost of a typical $220,000 mortgage by almost $15 a month; over 30 years, the fees would increase the total cost of such a mortgage by more than $5,000, according to the AP. In contrast, a worker making a $100,000 salary would reap a tax cut of about $330 through the two-month extension of the payroll tax cut. A worker with a typical $50,000 salary would get just a $165 tax cut.  

Officials said that in private talks, the two sides had hoped to reach agreement on the full one-year extension of the payroll tax cut and unemployment benefits that Obama had made the centerpiece of the jobs program he submitted to Congress last fall, but those efforts failed when the two sides could not agree on enough offsetting cuts to blunt the measure’s impact on the debt.  

The White House has signaled that President Obama will sign the bill.

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