Baker v. Commonwealth, No. 2005-CA-001588-MR (Ky. App. 10/19/2007)
| Decision Date | 19 October 2007 |
| Docket Number | No. 2005-CA-001588-MR.,2005-CA-001588-MR. |
| Parties | James M. BAKER, Appellant, v. COMMONWEALTH of Kentucky, Kentucky Retirement Systems and Board of Trustees of Kentucky Retirement Systems, Appellees. |
| Court | Court of Appeals of Kentucky |
Donald Duff, Frankfort, Kentucky, Oral Argument and Briefs for Appellant.
Brown Sharp, II, Frankfort, Kentucky, Oral Argument and Brief for Appellees.
Before: ACREE and VANMETER, Judges; KNOPF, Senior Judge.1.
This is an appeal from a judgment of the Franklin Circuit Court affirming a decision by the Board of Trustees of the Kentucky Retirement Systems. The Systems found that James Baker, a state retiree who had returned to state employment, was not entitled as a retiree to payment in full from the Systems of the monthly contribution toward his health insurance premiums, because he was also receiving a similar contribution from his new employer.
At its core, this case pits Baker's right to a specified retirement health care benefit against the Systems' policy ostensibly created to administer those benefits. Its resolution requires us to examine issues of Kentucky administrative law and statutory construction. Some are issues of first impression in Kentucky.
In summary, we find that Baker's right to the claimed retirement health care benefit is statutory and inviolable, that Baker did not waive that right, and that the Systems' policy is void because it violates provisions of Kentucky Revised Statutes (KRS) Chapter 13A. Therefore, we reverse.
Baker retired from his employment with the Legislative Research Commission after more than 27 years of service to the state. He immediately re-entered full-time state employment as general counsel to the Kentucky Teacher's Retirement Systems (KTRS). Consequently, Baker simultaneously enjoyed the benefits of his retirement from state government and the benefits of his employment by state government. In common parlance, he was a "double-dipper."2
Baker's double set of benefits included eligibility for group health insurance offered both through the Systems and through KTRS. He was also entitled to a separate specific contribution from each of these entities toward payment of his health insurance premium. Each such contribution is referred to in statute as a "state contribution."3 For each of the years 1991 to 1995, the state contributions to which Baker was entitled were more than sufficient to fully pay the premium for the health insurance coverage option Baker selected.
During these five years, Baker coordinated his available state contributions by means of "cross-referencing" the benefits entitlements. "Cross-referencing" is a practice applicable in group insurance plans to indicate that multiple benefits sources will contribute to the payment of a single insurance premium. Cross-referencing often occurs when a husband and wife both work for the same employer. However, cross-referencing with one's self occurs when one employee is entitled to contributions from two independent sources, as is the case before us.
Prior to 1996, regardless of whether a state employee cross-referenced, he forfeited any amount of state contribution that exceeded the premium for the coverage option he selected. And so it was with Baker. When Baker cross-referenced prior to 1996, he forfeited the excess of the total of the two contributions beyond the lower cost of his premium. However, an amendment to the group health insurance plan made it possible for each state employee, including Baker, to make full use of the state contribution, including the amount that exceeded the employee's premium. That amendment, effective in 1996, allowed state employees, for the first time, to participate in a medical Flexible Spending Account, or FSA.
Medical FSAs are creatures of federal statute, authorized as part of the Internal Revenue Code, Title 26 United States Code (U.S.C.) § 125. Such accounts provide tax savings to employees whose employers establish cafeteria plans that include a written plan document and an established "flexible spending account." Under this system, each employee estimates his out-of-pocket medical expenses for the upcoming year. Each pay period, by payroll deduction, the employer deducts a pro rata portion of this annual estimate from the employee's gross income and deposits the amount into the FSA. When the employee incurs a medical expense not covered by his insurance, he submits a receipt to the FSA administrator who reimburses the employee from the FSA.
Kentucky's legislature authorized FSAs in 1990 when it enacted KRS 18A.227, entitled "Flexible benefits plan for employees and retirees." Its title indicates the legislature's intent that FSAs be available to state retirees. Unfortunately, the legislature's desire was thwarted because the federal law authorizing FSAs requires that "all participants are employees[.]" 26 U.S.C. § 125(d)(1)(a). Baker, however, was both a retiree and an employee. Therefore, he could participate in the state's FSA program.
The possibility of benefiting from the new FSA program caused Baker to more closely consider the manner in which he cross-referenced his two health insurance premium funding sources. During the open enrollment period in November 1995, he contacted an insurance coordinator at the System's offices in Frankfort and asked if there were any policies or procedures affecting the manner in which his two premium payment sources could be coordinated. He also asked the same question of a representative of Plan Source, the state's health insurance purchasing alliance. Both representatives told him they knew of no applicable policies.
Baker then met with the KTRS Payroll Officer, Annie Martin (Martin). Just as with the representatives Baker previously asked, Martin was unaware of any policy affecting how Baker could coordinate his two premium payment sources.
A representative of the Systems would later testify, however, that Martin should have known of a longstanding, unwritten, Personnel Cabinet policy that required a double-dipper's employer to pay its full state contribution, as required by KRS 18A.225(2)(h), before the Systems paid any portion of its state contribution obligation. The Systems would then pay only the balance remaining necessary to fully fund the premium selected, not to exceed the state contribution rate for that year. This unwritten policy was created when the combination of the two state contributions exceeding the cost of the premium was forfeited. The policy was obviously for the benefit of the agencies rather than the retiree since it primarily determined which agency was entitled to retain the forfeited amount. Under this policy, the Systems always retained the unused and forfeited amount. No agency ever considered how adding an FSA program to employee benefits would affect the policy, or vice versa.
The legislature imposed upon the Personnel Cabinet the responsibility for developing an FSA program for eligible employees. KRS 18A.227(2). The Cabinet was not prohibited from developing a program that would have excluded excess state contributions as a source for funding an employee's FSA account. But it did not do so. The program the Cabinet developed specifically authorized an employee to direct the excess state contributions, previously forfeited, into his own FSA account. (R. 174, 177).
Unaware of what Martin allegedly should have known, and believing he had informed himself as fully as possible, Baker decided on a health insurance coverage option for himself and his family, for 1996, that cost $245.92 per month. Because he was entitled to $175.50 per month (the state contribution rate for 1996) from each of his premium payment sources for a total of $351.00, he planned to have the difference, $105.08, deposited into his FSA.
All parties understood throughout this case, and this Court does not question, that FSAs cannot be funded from retirement benefits. This led Baker to ensure that the only funding source for his FSA was by payroll deduction out of the gross pay he received from his employer, KTRS. He accomplished this by carefully completing the required human resources paperwork both at KTRS and the Systems.
The actual insurance application process required Baker to indicate his intent to cross-reference on two separate enrollment forms provided by the health plan administrator, Plan Source. He completed the first form, entitled "Employee Enrollment Application," with Martin's assistance. The forms anticipated the circumstance of spouses cross-referencing with one another and had blanks on the form for that purpose. However, owing apparently to the infrequency with which "cross-referencing with self" occurred, no similar blanks were provided for that purpose. With Martin's assistance, however, Baker indicated his intent to "cross-reference with self," and identified the other payment source as "KERS" (that is, the Kentucky Employees' Retirement System), by writing those words near the blanks provided for spousal cross-referencing.
Consistent with Baker's desire to have the Systems pay his insurance retirement benefit in full first, Payroll Officer Martin made notations in the margin of the form as follows:
245.92 70.42
-175.50 KERS -175.50 KTRS
70.42 -105.08
Nothing in the record contradicts the interpretation given by all parties to these figures. Martin first wrote Baker's monthly premium payment due of $245.92. Then, Martin indicated Baker's intent that the state contribution from the Systems (identified by Martin as "KERS"), in the amount of $175.50, was to be paid in full toward the insurance premium first, leaving a balance due on the premium of $70.42. The next column shows the balance of $70.42 being paid by the KTRS state contribution of $175.50. The excess...
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