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5500 Preparer's Manual for 2012 Plan Years
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ERISA preempted a small business owner's claim that a pension third party administrator acted negligently and breached its fiduciary duty with respect to its administration of the owner's "412(i)" plan, the U.S. Court of Appeals in Atlanta (CA-11) has ruled.
412(i) plan
A small business owner created a Code Sec. 412(i) plan in 2002. In 2003, a pension third party administrator took over as plan administrator. In 2004, the IRS issued new rules explaining that it would consider 412(i) plans with certain design features to be listed transactions, subject to serious penalties. The TPA determined the owner's plan to be at risk and drafted an amendment to correct the plan's problems. The business owner was not informed of the new IRS rules or the amendment (which was never adopted). The IRS audited the plan in 2006 and assessed significant penalties.
State law claims
The business owner filed suit in state court alleging, among other things, negligence and breach of fiduciary duty. The TPA successfully removed the action to federal court on ERISA preemption grounds. The business owner appealed.
Davila standard
The appellate court applied the Supreme Court's analysis in Aetna Health Inc. v. Davila to determine whether ERISA preempted the state law claims. It first considered whether the owner's claims fall within the enforcement mechanism under ERISA §502(a). The owner argued they did not, as the claims concerned the design and repair of the plan, and not its administration. The court conceded that not all of the owner's assertion's fell within ERISA's reach, but noted that the owner's claim of breach of fiduciary duty was clearly a potential claim under ERISA §409 (and thus eligible for enforcement under ERISA §502).
Turning to the second prong of the Davila analysis, the court determined that the legal duty the TPA was alleged to have breached --its fiduciary duty to the owner, as well as duties to disclose information --was dependent upon the existence of an ERISA plan. Thus, there was no independent claim that would have defeated ERISA preemption.
Arbitration claim
The court rejected the TPA's assertion that the business owner's claims were subject to arbitration. It's true the parties agreed to submit to arbitration any disputes regarding services as listed in "Section VI" of their agreement, but they failed to include a "Section VI" in the agreement.
Source: Ehlen Floor Covering, Inc. v. Innovative Pension Strategies, Inc. (CA-11).
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For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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