New York Law Review

Tag: Employee Benefit Plan

  • Morgan Guaranty Trust Co. v. Tax Appeals Tribunal, 80 N.Y.2d 41 (1992): ERISA Preemption of State Tax Laws Affecting Benefit Plans

    Morgan Guaranty Trust Co. v. Tax Appeals Tribunal, 80 N.Y.2d 41 (1992)

    A state tax law of general application is preempted by ERISA if it has more than a tenuous, remote, or peripheral connection to employee benefit plans, considering the structural, administrative, and economic impact of the tax on the plan.

    Summary

    Morgan Guaranty Trust Co., as trustee for an employee benefit plan, challenged New York’s real property transfer gains tax, arguing ERISA preemption. The plan sold property to comply with ERISA’s prohibited transaction rules and incurred a $205,262 tax. The Court of Appeals held that the tax was preempted because it directly affected the plan’s investment strategy, imposed administrative burdens, and depleted funds otherwise available for benefits. The court emphasized that ERISA aims to establish uniform federal regulation of benefit plans, and the tax’s direct impact on plan assets was inconsistent with this goal. The decision highlights the broad preemptive scope of ERISA over state laws that significantly impact employee benefit plans.

    Facts

    In 1965, the American Motors Corporation Union Retirement Income Plan purchased real property in Greenburgh, NY, and leased it back to an affiliate. In 1983, counsel advised American Motors that the lease was a prohibited transaction under ERISA due to lagging market rates. The plan sold the property in June 1984 to another affiliate for $2,775,640 to avoid tax penalties under ERISA.

    Procedural History

    Morgan Guaranty Trust Co. paid the New York gains tax of $205,262 on the property transfer. Morgan filed a refund claim, arguing ERISA preemption, which the Department of Taxation and Finance denied. The Administrative Law Judge granted Morgan’s administrative petition. The Tax Appeals Tribunal reversed, finding the tax’s impact too tenuous. The Appellate Division annulled the Tribunal’s determination, holding the tax was preempted. The New York Court of Appeals then reviewed the case.

    Issue(s)

    Whether a state tax law of general application, specifically New York’s real property transfer gains tax, is preempted by ERISA when applied to the sale of real property by a qualified employee benefit plan.

    Holding

    Yes, because the gains tax has more than a tenuous, remote, or peripheral connection to employee benefit plans, considering the structural, administrative, and economic impact of the tax on the Plan.

    Court’s Reasoning

    The court began by noting ERISA’s broad preemption clause, stating that all state laws are superseded insofar as they relate to any employee benefit plan. It cited 29 U.S.C. § 1144(a) and emphasized that this clause was designed to establish exclusive federal regulation of pension plans. The court acknowledged that while certain state laws may affect employee benefit plans in too tenuous a manner to warrant preemption, this was not such a case. The court analyzed the structural, administrative, and economic impact of the tax on the Plan, concluding that it was significant. The court reasoned that the gains tax would influence the Plan’s investment strategy, requiring fiduciaries to consider the state law’s impact, thus making real estate investments in New York less attractive. The court stated, “As the Supreme Court has made clear, it is undesirable to require plans and employers to tailor their conduct ‘to the peculiarities of the law of each jurisdiction.’” The court also highlighted the favorable tax treatment given to benefit plans under the Internal Revenue Code, noting that the gains tax depletes funds otherwise available for providing benefits. “Unlike other forms of general State regulation that may have only incidental effect on plan resources, the gains tax ‘directly depletes the funds otherwise available for providing benefits’ and flies ‘in the face of ERISA’s goal of assuring the financial soundness of such plans.’” Finally, the court distinguished this tax from others that have been allowed, such as taxes on employees’ income or withholding procedures on payments to beneficiaries, because this tax directly depletes Plan assets. The court emphasized that it is a direct tax on plan profits and concluded that because it affects the structure, administration, and economics of a covered plan, it relates to it in more than a tenuous way.

  • Retail Shoe Health Comm. v. Reminick, Aarons & Co., 62 N.Y.2d 173 (1984): ERISA Preemption of State Law Claims Against Fiduciaries

    Retail Shoe Health Comm. v. Reminick, Aarons & Co., 62 N.Y.2d 173 (1984)

    ERISA preempts state law claims for contribution or indemnity against employee benefit plan fiduciaries based on breaches of their fiduciary duties, vesting exclusive jurisdiction in federal courts.

    Summary

    This case addresses whether ERISA preempts state law claims against trustees of an employee welfare benefit plan. The Retail Shoe Health Commission sued its accountants for failing to detect misappropriations by the fund’s administrator. The accountants then filed a third-party complaint against the trustees for contribution or indemnity, alleging the trustees’ breach of fiduciary duties contributed to the losses. The New York Court of Appeals held that ERISA’s preemption provisions govern such claims, precluding state court actions. The court reasoned that ERISA vests exclusive jurisdiction over these matters in federal courts, superseding state laws regarding fiduciary duties related to ERISA plans.

    Facts

    The Retail Shoe Health Commission (Fund), a multiemployer welfare fund, sued its accountants, Reminick, Aarons & Company, for failing to detect the administrator’s misappropriation of $675,000. Reminick filed a third-party complaint against the Fund’s individual trustees and Tolley International Corporation (the Fund’s actuarial and consulting service), seeking contribution or indemnity. Reminick alleged that the trustees’ negligence in supervising the administrator contributed to the loss. Tolley filed counterclaims and crossclaims against Reminick, the Fund, and the trustees, also seeking contribution or indemnity.

    Procedural History

    The individual trustees moved to dismiss Reminick’s third-party complaint and Tolley’s claims, arguing that the court lacked subject matter jurisdiction under ERISA. The Supreme Court denied the motion, finding ERISA did not preempt state law in this instance. The Appellate Division affirmed without opinion, granting the trustees leave to appeal to the New York Court of Appeals. The Court of Appeals then reversed the lower courts’ decisions.

    Issue(s)

    Whether ERISA preempts state law claims for contribution or indemnity against the individual trustees of an employee welfare benefit plan, when those claims are based on alleged breaches of the trustees’ fiduciary duties.

    Holding

    Yes, because ERISA’s provisions supersede all state laws relating to employee benefit plans, and ERISA vests exclusive jurisdiction in federal courts for civil actions arising under the Act involving breaches of fiduciary duty by plan trustees.

    Court’s Reasoning

    The court emphasized ERISA’s broad preemption clause, which supersedes state laws relating to employee benefit plans. The court stated that “the Federal law pre-empts State regulation of ERISA employee benefit plans. The Act provides expressly that its provisions shall supersede all State laws insofar as they may relate to any employee benefit plan within its embrace.” The trustees are fiduciaries under ERISA, and Reminick’s and Tolley’s claims allege breaches of those fiduciary duties. ERISA §§ 404, 405, and 409 govern the duties and liabilities of these trustees. The court noted that ERISA § 502(e) vests exclusive jurisdiction in federal district courts over civil actions arising under ERISA. The court rejected the argument that because Reminick and Tolley are not among those listed in ERISA § 502(a) as parties who can bring a civil action, ERISA should not preclude their claims. The court stated, “Inasmuch as ERISA preempts all claims based on alleged breach of fiduciary duty on the part of ERISA trustees and vests jurisdiction for their enforcement exclusively in the Federal courts, the circumstance that persons in the outboard position of Re-minick and Tolley may have no statutory standing to bring such an action under the Federal regulatory scheme is merely an aspect of that scheme.” The court also held that claims for contribution and indemnity under state law (e.g., CPLR art 14; Dole v Dow Chem. Co.) are superseded by ERISA. Finally, the court addressed Tolley’s argument regarding pre-ERISA transactions, stating that while ERISA preemption does not apply to acts or omissions before January 1, 1975, Tolley had not pleaded such claims separately. However, the dismissal was without prejudice, allowing Tolley to seek leave to replead claims based on pre-1975 transactions.