Samuel R. Jahnke and Sons et al v. Blue Cross and Blue Shield of Kansas, Inc.
MEMORANDUM AND ORDER granting plaintiffs' request for remand. Signed by District Judge J. Thomas Marten on 8/6/2012. (mss)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
SAMUEL R. JAHNKE AND SONS, MARY K.
JAHNKE, EXECUTOR OF THE ESTATE OF
SAMUEL R. JAHNKE,
Case No. 10-4098-JTM
BLUE CROSS AND BLUE SHIELD OF KANSAS,
MEMORANDUM AND ORDER
On June 21, 2012, the court heard evidence and argument relating to the
application of the Employee Retirement Security Act of 1974 (ERISA), § 1001-1461 to
plaintiffs’ claims. Specifically, the parties addressed the potential application of the
ERISA “safe harbor” provision, 29 C.F.R. § 2510.3-l(j),1 or rather, one element of that
provision, determining whether the payments to Blue Cross for the Jahnke’s health
insurance “[we]re made by an employer.”
The safe harbor provision provides an exclusion from ERISA, provided that:
No contributions are made by an employer or employee organization;
(2) Participation [in] the program is completely voluntary for employees or members;
(3) The sole functions of the employer or employee organization with respect to the
program are, without endorsing the program, to permit the insurer to publicize the
program to employees or members, to collect premiums through payroll deductions or
dues checkoffs and to remit them to the insurer; and
(4) The employer or employee organization receives no consideration in the form of cash
or otherwise in connection with the program, other than reasonable compensation,
excluding any profit, for administrative services.
In its prior Memorandum and Order denying Blue Cross’s motion for summary
judgment, the court discussed the standards relating to the safe harbor, and those
conclusions are incorporated herein. (Dkt. 43, at 9-11). The court further notes that Blue
Cross, as the party asserting federal jurisdiction, has the burden of proving the plan in
question is subject to ERISA. Settles v. Golden Rule Ins., 927 F.2d 505, 508 (10th Cir.
1991). Thus, it has the burden of showing that the plan falls outside the safe harbor. See
Merrick v. Northwester Mut. Life Ins., No. 99–CV–1042(MJM), 2001 WL 34152095, *7
(N.D.Iowa 2001) (“the burden is on defendant to establish that the safe harbor
regulation is inapplicable”).
Mary Jahnke testified that she was the wife of Samuel Jahnke, and served as the
secretary for the Jahnke & Sons S Chapter corporation since its foundation. The
corporation has no benefit plan, and offers no benefits such as vacation or sick leave.
The corporation had no group health policy. Instead, individual shareholders had their
own individual policies. Mary Jahnke testified that she paid insurance bills from Blue
Cross from the corporate account, and did so under the advice of her accountant, Gary
Gary Edwards is a Certified Public Accountant, and has been the accountant for
the Jahnkes since 1998. Edwards specifically asked Mary Jahnke to make the payments
from the corporate account as a convenience in his accounting service, and that the
payments were treated as distributions to the shareholders. The payments were not
treated as corporate expenses in Edwards’s records. They were instead isolated
precisely for the purpose of treating them as shareholder distributions for tax purposes.
Edwards credibly testified that
it was by my suggestion that [Mary Jahnke] pay them through the
corporation in order to avoid having to delve into their personal
checkbooks for those items at the end of the year. Try to save them some
money where you can. We don't want to -- a lot of extra effort, a lot of
extra work goes into digging into individual checkbooks and we were just
trying to save them some money by not having to do that.
The court finds that the plaintiffs have established that the health insurance
premiums were paid by the individual shareholders of Jahnke & Sons. While the bills
were paid by checks issued on the corporate account, the payments were treated as
distributions to the shareholders.
Although defendant Blue Cross attempts to impeach the plaintiffs’ position, the
court finds that the grounds offered do not justify the conclusion that the payments
were made by the individual shareholders. The defendant’s arguments center heavily
on the validity of the plaintiffs’ actions under applicable federal tax law. Thus, they
argue that any deductions by the shareholders would not have been proper under I.R.C.
§ 162(l). But the ultimate validity of the shareholder’s returns under federal tax law is
not an issue before the court, and in any event does not discredit the clear and credible
evidence from both Mary Jahnke and Gary Edwards that the payments were adopted as
a convenience to Edwards. The payments were, and were intended to be, distributions
from the corporation.
In this regard, the court stresses that both Mary Jahnke and Gary Edwards
testified with particular credibility. Further, the intention to treat the premium
documentation. Edwards made no notation of any expenses for the payment of health
care premiums in the corporation’s Form 1120 tax returns. Instead, the premium
payments are shown as distributions in the K-1 tax returns of the individual
shareholders. And the premium payments were also discretely treated in Edwards’s
contemporaneous ledgers, in order to facilitate their separate treatment as distributions.
As a result, the court finds that Blue Cross has failed to demonstrate that ERISA
is applicable to the present action. This action was removed by Blue Cross, solely on the
grounds of complete ERISA preemption (Dkt. 1, at ¶ 8, 10). Under 28 U.S.C. § 1447(c),
“[i]f at any time before final judgment it appears that the district court lacks subject
matter jurisdiction, the case shall be remanded.” Because ERISA, the only basis for Blue
Cross’s removal of the action, is inapplicable to the plaintiffs’ claims pursuant to the
safe harbor, the court is without subject matter jurisdiction to hear the case. See Arndt v.
Concert Health Plan Ins., No 8:09-CV-1239-T, 2010 WL 151996, *4 (M.D. Fla. 2010)
(remanding action to state court after insurer failed to show safe harbor to ERISA
inapplicable); Mapp v. American General Assur., 589 F.Supp.2d 1257, 1265 (M.D. Ala.
2008) (because “the plan falls within the safe harbor and does not qualify as an
employee-welfare-benefit plan within the meaning of ERISA … the court is without
subject-matter jurisdiction”); Kerr v. Untied Teacher Assocs., 313 F.Supp.2d 617, 620
(S.D.W.Va. 2004) (finding a lack of subject matter jurisdiction and remanding action
since “the policy appears to fit all of the characteristics of the safe harbor provision, or at
least Defendant has not shown that it does not”).
At the hearing, plaintiffs expressly requested that the action be remanded back to
state court, and the court indicated that this was the appropriate result. (Tr. 93, 100).
Consistent with the court’s conclusions at the hearing, the court finds that ERISA does
not preempt Plaintiffs’ claim, and there is no federal question to serve as a basis for
subject matter jurisdiction. The plaintiffs’ request for remand in accordingly granted.
SO ORDERED this 6th day of August, 2012.
s/ J. Thomas Marten
J. THOMAS MARTEN, JUDGE
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