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“You owe us the money we invested in the plan that you misrepresented to us,” said Winnie, an employer, to Victor, a plan representative from whom she bought her company's welfare benefit fund.
“We did nothing wrong and do not owe you a refund,” Victor said. “You should challenge the Internal Revenue Service's characterization of the plan.”
FACTS:An employer invested more than $3 million in a voluntary employees' beneficiary association after it was contacted by a plan representative who described the VEBA as compliant with tax code Section 419A(f)(6), making it exempt from the limitations placed on deductions taken for employer contributions to certain welfare plans.
The employer was told that the plan would substantially reduce its tax obligations while providing important insurance benefits, court documents said.
The employer was told that because the plan was not a listed transaction, it would not have to file a Form 8886 with the IRS as it normally would when investing in any other listed transaction, the documents said.
The employer was then “inundated” with promotional materials that described the VEBA as a “seductively simple” way to contribute substantial cash sums completely deductible from their federal income tax liability, the documents said.
An Internal Revenue Service audit determined the VEBA to be an unlawful listed transaction, and substantial penalties were imposed on the employer for its failure to file the appropriate forms.
The plan and its representatives refused to refund the investments, instead only permitting the employer to convert existing policies for a fraction of the original investment.
The employer filed a state court lawsuit that claimed fraudulent and negligent misrepresentation of VEBA's tax status.
The employer did not claim that the plan and its representatives had any independent duty to it outside the duties owed under the plan as trustee. Also, the employer's fiduciary duty and negligence claims must arise from the plan, and the claim thus falls within the scope of ERISA, the plan and its representatives said.
The plan and its representatives successfully removed the case to federal district court from state court on the grounds that the employer's claims of breach of fiduciary duty and negligence arise under the Employee Retirement Income Security Act.
The IRS disqualified an employer's plan from tax benefits and imposed penalties.
The employer said its claims were not preempted by ERISA because they were based entirely on the representatives' “pre-plan misrepresentations” that induced it to invest in the plan.
The claims were state law actions because they do not seek plan benefits, request a plan interpretation or relate to enforcement of rights under the plan, the employer said, seeking to return the case to state court.
ISSUE: Does ERISA preempt a lawsuit that claimed fraudulent inducement to invest in a welfare benefit fund?
DECISION:ERISA does not preempt the lawsuit that claimed fraudulent inducement to invest in a VEBA, a federal district court ruled.
Each of the employer's claims stemmed from alleged misrepresentations and omissions made by the plan and its representatives to induce the employer to invest in the plan before it was formed, so the claims were not subject to ERISA, the federal district court said.
Further, the court said that all of the complained-of conduct occurred before the plan's formation and “does not implicate the administration, interpretation, or recovery of benefits of the plan or relate to a violation of the plan's terms.”
Concluding that the employer's claims rested on “independent statutory and common-law duties that proscribe misrepresentation in various forms,” the court granted the employer's request and returned the case to state court (Patel v. Sea Nine Assocs., Inc.,2014 BL 135909, N.D. Tex., No. 3:13-cv-04491-B, 5/15/14).
POINTERS:A VEBA is a self-funded employee welfare benefit plan established as a tax-exempt association or trust.
The income tax exemption extends to VEBAs that provide life, sick, accident or other similar benefits to the VEBA's members, their dependents or their designated beneficiaries, if no part of the VEBA's earnings go to the benefit of any private shareholder or individual except through benefit payments.
The tax consequences to the employer and to the employees of providing benefits through a VEBA depend on the type of benefits offered and the method by which they are provided.
Contributions to a welfare benefit fund, including a VEBA, are deductible only if the contribution satisfies the special limits and all other general deduction rules of the tax code.
Employer contributions to a VEBA, or payments by the VEBA for life, sick or accident benefits, are not considered wages subject to Social Security taxes or federal unemployment taxes.
For more information, see Compensation & Benefits Library's “Voluntary Employees' Beneficiary Associations” chapter.
To contact the editor on this story: Michael Trimarchi at firstname.lastname@example.org.
This analysis illustrates how courts resolve pay-related disputes. The names and dialogue are fictitious.
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