Cattau v. National Insurance Services

NEUBAUER, RJ.

¶ 13 (concurring). The plaintiffs allege in their amended complaint that the defendants wrongfully structured the 403(b) plan or that they should have adopted an alternative plan. They concede, however, that the IRS properly assessed income taxes and interest against them and the school district under the plan adopted. They state that they have paid all amounts owed to the IRS and do not seek a refund from the IRS, and thus concede they have no claim for those amounts against the defendants, again, under the plan adopted. Rather, the plaintiffs seek compensatory damages, arising from defendants' negligent representations and administration of their retirement plan — including perhaps taxes and interest they would not otherwise have had to pay. They also seek damages associated with their retirement and financial decisions made in reliance upon the defendants' representations and administration of the plan. As the majority concludes, these claims are not tax refund claims, seeking recovery of taxes wrongfully collected by the government or the tax collector employer under applicable tax law, that would be preempted under 26 U.S.C. § 7422 (2012).

¶ 14 Davidson v. Henkel Corp., No. 12-cv-14103, 2013 WL 3863981 (E.D. Mich. July 24, 2013) (Henkel I, ruling on motion to dismiss), 2015 WL 74257 (E.D. Mich. Jan. 6, 2015) (Henkel II, ruling on summary judgment), a case involving the alleged wrongful administration of a retirement plan, provides guidance as to which claims may move forward without the prerequisite of proceedings before the IRS under 26 U.S.C. § 7422. Henkel decided to retire after discussing his options with the plan administrator, after which it was determined that taxes had not properly been withheld pursuant to the Federal Insurance Contributions Act (FICA), 26 U.S.C. §§ 3101-3128 (2012). Henkel I, 2013 WL 3863981, at *1. Henkel's employer paid the FICA tax due and adjusted retirees' benefits to recoup the payment. Id. at *2. Henkel sued, alleging violations of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. §§ 1001-1461 (2012). Henkel I, 2013 WL 3863981, at *2. Among other arguments, the employer contended that Henkel's suit was barred by 26 U.S.C. § 7422, maintaining Henkel's entire suit was for a "tax refund in disguise." Henkel I, 2013 WL 3863981, at *4. The district court rejected this characterization.

Defendants have misconstrued the nature of Plaintiff’s claims, which do not seek to recover a tax refund based on improperly withheld FICA taxes. Contrary to Defendants' argument, Plaintiff does not allege that his taxes were "erroneously or illegally assessed or collected" nor that penalties were "collected without authority." Plaintiff concedes that the FICA taxes were properly assessed and collected and he has no claim for a tax refund. Plaintiffs claims therefore rest on his allegations that Defendants failed to properly withhold his FICA taxes upon his retirement in 2003 resulting in the loss of the benefit of the non-duplication rule and a decrease in his promised retiree benefits.

. . . Similarly, Plaintiffs claims are not implicated by § 7422 because Plaintiff does not allege any wrongdoing on the IRS's part, thus it is not alleged that the IRS erroneously collected FICA taxes ... in accordance with the special timing rule resulting in a decrease to his promised retiree benefits .... Plaintiff is not challenging Defendants' withholding of FICA taxes, rather he is challenging their failure to follow the special timing rule resulting in a reduction to his benefits. Therefore, § 7422 does not bar Plaintiffs claims.

Id. at *4-5 (citations omitted). As the court further explained in its decision on summary judgment: Henkel II, 2015 WL 74257, at *3 (emphasis in original).¹ See also Childers v. New York & Presbyterian Hosp ., 36 F. Supp. 3d 292, 303-04 (S.D.N.Y. 2014); McMaster v. Coca-Cola Bottling Co. of Cal., 392 F. Supp. 2d 1107, 1112-13 (N.D. Cal. 2005).

[T]he Plaintiffs have repeatedly focused on how the FICA issue arose, arguing that it was a result of Defendants breaching their obligations under the Plan. Defendants attempt to frame this case as one solely about the handling of taxes after the FICA issue arose.

. .. This case is not about how Defendants resolved the FICA issue after it arose, but instead about how the FICA issue came about in the first place. Intrinsically, this case is not about taxes, but is instead about Defendants' administration of the Plan.

¶ 15. Factually, our case is on all fours with Henkel, and the result is the same. The plaintiffs' allegations are not about taxes wrongfully withheld under applicable tax law, but about whether the plaintiffs' damages, including taxes and interest that would not otherwise be paid under applicable tax law, were caused by defendants' representations and administration of the plan. Therefore, the claims are not preempted under 26 U.S.C. § 7422.

¶ 16. As the majority states, the only issue decided here is that preemption does not bar the plaintiffs' claims that do not seek tax refunds, as the circuit court addressed preemption only. We do not address the defendants' arguments that the complaint should be dismissed on other grounds, such as failure to state a claim, nor do we decide on this motion to dismiss whether other tax beneficial plans were available under applicable tax law given the multiyear income stream.

1 Henkel II refers to plaintiffs in the plural while Henkel I uses the singular because in Henkel I the class of plaintiffs had not yet been certified. See Davidson v. Henkel Corp., No. 12-cv-14103, 2013 WL 3863981, *1 & n.1 (E.D. Mich. July 24, 2013) (Henkel I, ruling on motion to dismiss), 2015 WL 74257, *1 (E.D. Mich. Jan. 6, 2015) (Henkel II, ruling on summary judgment, noting that class was certified on September 29, 2014).