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Why ERISA Was Enacted

It’s sometimes tempting to conclude that ERISA imposes unnecessary duties on plan fiduciaries – but then we see a case that confirms Congress’ wisdom in creating those duties. Such a case was recently decided by an Alabama federal court. The decision in this case, Cromer-Tyler v. Edward R. Teitel M.D., serves as a roadmap for what plan fiduciaries should not do in administering a retirement plan.

This case involved a claim by a former employee (Dr. Cromer-Tyler) to an account balance of less than $10,000 under a money purchase pension plan maintained by a medical practice. But when all the dust had settled, the court had assessed statutory penalties of nearly $180,000 (plus attorneys’ fees) against the owner of that practice (Dr. Teitel), in his capacity as plan administrator. What did Dr. Teitel do to draw this judicial spanking?

Well first, Dr. Teitel admitted that, although he was designated as the plan administrator, he had no idea that he had any fiduciary duties. Consistent with that lack of understanding, he had failed to disseminate summary plan descriptions (or other information concerning the plan), failed to maintain the fidelity bond required under ERISA, failed to file the required Annual Reports, and directed the investment of his own account balance without even informing other participants that the plan gave them that same right.

Dr. Cromer-Tyler declined to purchase the practice from Dr. Teitel, Dr. Teitel terminated her employment. Dr. Cromer-Tyler then set up her own medical practice, leading Dr. Teitel to perfect the art of breaching his fiduciary duties.

For instance, in response to a request from Dr. Cromer-Tyler’s attorney for information concerning her rights under the plan, Dr. Teitel sent a letter to Dr. Cromer-Tyler stating that she had no vested account balance. In fact, the plan provided that she was 100% vested at all times. Dr. Teitel’s letter neither referred to the pertinent plan provisions nor explained the plan’s claim review procedures.

Moreover, the evidence showed that Dr. Teitel had a motive for misinforming Dr. Cromer-Tyler as to her vesting status. Dr. Teitel’s accountant had previously informed him that any amounts contributed to the plan on behalf of Dr. Cromer-Tyler would eventually be forfeited, and then largely reallocated to Dr. Teitel’s own account.

In response to a follow-up letter from Dr. Cromer-Tyler’s attorney, Dr. Teitel refused to provide any plan documents. Not until more than 4½ years after the original request for plan documents (and 1½ years after the lawsuit had been filed) did one of Dr. Teitel’s pleadings finally attach a copy of the plan’s vesting provisions.

More than three years after that, Dr. Teitel (as the plan administrator) finally issued a decision stating that Dr. Cromer-Tyler was vested in her account balance. In the meantime, he had asked the plan’s custodian to charge Dr. Cromer-Tyler’s account with a portion of the attorney’s fees incurred by Dr. Teitel in defending against her lawsuit. And even when he finally granted Dr. Cromer-Tyler’s claim for benefits, he conditioned her receipt of those benefits on her signing a “general and complete release of all claims.” The court eventually held that both of those actions were contrary to Dr. Teitel’s obligations under ERISA.

As a result of Dr. Teitel’s failure to respond to the requests for relevant documents from Dr. Cromer-Tyler’s attorney — including the plan’s vesting schedule, which would have demonstrated Dr. Cromer-Tyler’s right to receive her account balance — the court assessed the maximum statutory disclosure penalty against Dr. Teitel. This was $110 per day for each of the 1,636 days between the end of the 30-day period ERISA allows for an administrator to provide those documents and the date on which they were actually provided. This amounted to $179,960. In addition, the court signaled its intention to grant Dr. Cromer-Tyler’s separate motion that Dr. Teitel be required to pay her costs and attorneys’ fees incurred in the litigation.

Although the court noted that Dr. Cromer-Tyler was not entitled to recover any monetary damages as a result of Dr. Teitel’s numerous breaches of his fiduciary duties, the court justified its award of the maximum statutory penalty and attorneys’ fees on the occurrence of these fiduciary breaches.

Though it is certainly unusual to see a penalty award that is nearly 20 times the amount of the benefits at stake in an ERISA lawsuit, this case illustrates that a court confronted with an egregious set of facts may choose to use the statutory disclosure penalty as a way of punishing a breach of fiduciary duty.Obviously, other plan administrators will want to draw a cautionary lesson from this decision.