Michigan State Employees Ass'n v. Marlan

• Decision Date: 28 November 1984
• Docket Number: No. G83-1507 CA5.,G83-1507 CA5.
• Citation: 608 F. Supp. 85
• Parties: MICHIGAN STATE EMPLOYEES ASSOCIATION, a non-profit Michigan corporation; and Sheila Strunk and Shirley Kindt, on behalf of themselves and all other Michigan State Employees Association Members similarly situated, Plaintiffs, v. Duane MARLAN, Michigan Civil Service Employee Benefits Director, the Michigan Department of Civil Service, and the Michigan Civil Service Commission, Defendants.
• Court: U.S. District Court — Western District of Michigan

608 F. Supp. 85

MICHIGAN STATE EMPLOYEES ASSOCIATION, a non-profit Michigan corporation; and Sheila Strunk and Shirley Kindt, on behalf of themselves and all other Michigan State Employees Association Members similarly situated, Plaintiffs, v. Duane MARLAN, Michigan Civil Service Employee Benefits Director, the Michigan Department of Civil Service, and the Michigan Civil Service Commission, Defendants.

No. G83-1507 CA5.

United States District Court, W.D. Michigan, S.D.

November 28, 1984.

Fraser, Trebilcock, Davis & Foster by Michael E. Cavanaugh, Lansing, Mich., for plaintiffs.

Frank J. Kelley, Atty. Gen. by Robert S. Welliver, Lansing, Mich., for defendants.

OPINION RE MOTION TO DISMISS

HILLMAN, District Judge.

This is a class action filed on behalf of the Michigan State Employees Association (MSEA) and its members challenging the interpretation of certain Internal Revenue Code (IRC) provisions and Treasury regulations by defendants, Michigan Department of Civil Service (MDCS), Michigan Civil Service Commission (MCSC), and Duane Marlan, Michigan Civil Service Employee Benefits Director. At issue is section 105(a) of the IRC, 26 U.S.C. § 105(a), and Treasury Regulations 1.105-1(c)(2) and (c)(3). Those provisions govern income reporting to the Internal Revenue Service (IRS) by the State of Michigan, as an employer, with respect to Long Term Disability (LTD) plan benefits received by the State's employees.

Defendant MCSC maintains a LTD plan covering all Civil Service employees of the State. The LTD plan is an insured group policy purchased with combined premium contributions of the State, as employer, and the State's employees. Plaintiff class of MSEA members are state employees covered by the LTD plan.

Section 105(a) of the IRC provides, in pertinent part, that such LTD benefits received by an employee must be included in the employee's gross income and are taxable to the extent the benefits are attributable to employer contributions. F.I.C.A. withholding for the employer's portion of the LTD premium is required.

The LTD plan provides benefits to sick and disabled individuals once all their sick leave has been utilized, and hence the amount of employer and employee contributions toward the LTD premium varies depending upon the amount of sick leave the employee has accumulated, as reflected in three subplans under the policy based on accumulated sick leave. Subplan I employees are those with 184 or less hours of accumulated sick leave; subplan II employees are those with 184 to 528 hours of accumulated sick leave; and subplan III employees are those with more than 528 hours of accumulated sick leave. The subplans recognize that the more accumulated sick leave an employee has, the less likely it is that the plan will have to pay out benefits to the employee, and the employee's percentage contribution toward the LTD premium is accordingly reduced.

In 1979, the MCSC ordered the State to pay 50% of the cost of the LTD policy with the employee paying the remaining 50%. Where, under the subplans referenced above, the State had been paying less than 50% of the LTD premium, it was required to supplement the amounts contributed by the employees in the subplan so that the State's actual share of the contribution was brought up to 50%.

Treasury Regulation 1.105-1(c)(2) provides that where different classes of employees make different contributions to such a plan, the employer must, for IRS reporting purposes, make a separate determination for each class of employees of the portion of the amounts received under the LTD plan which is attributable to employer contributions. Treasury Regulation 1.105-1(c)(3), however, provides that if the respective contributions of the employer and its employees can't be ascertained, then the employer is permitted to calculate the employer/employee contribution determination under Treasury Regulation 1.105-1(d)(2) for all employees under the LTD plan without regard to different classes. Defendants have historically taken the view that the State's contribution toward the LTD premium cannot be "individualized," and thus treat the plan as contemplating one indivisible group and one fixed "employer contribution" of 50%. Thus, under Regulation 1.105-1(d)(2), F.I.C.A. is withheld on 50% of the LTD benefits paid to an employee and 50% of the LTD benefits are reported as taxable "other compensation" on the employee's W-2 form.

Plaintiffs argue that because subplan I, II and III employees contribute different amounts toward the LTD plan premium, they constitute different classes of employees under Regulation 1.105-1(c)(2) and the State is therefore required to make a separate determination of the amounts contributed to the LTD plan premium by the State and each class of employees. Plaintiffs contend that defendants have refused to do so in direct violation of the stated IRC section and regulation.

Plaintiffs seek declaratory and injunctive relief, specifically a judgment declaring that, for purposes of IRC § 105(a), there are different classes of MSEA member employees under the plan and its subplans, and directing defendants to make the employer-employee contribution determination required by Regulation 1.105-1(c)(2) for each such employee class under the LTD plan. Plaintiffs further seek reasonable attorney fees under 42 U.S.C. § 1983 for defendants' alleged violations of plaintiffs' rights under the IRC. Federal question jurisdiction as to Count I purportedly rests on the conflicting interpretations of the IRC and its regulations, and jurisdiction as to Count II rests on a purported violation of plaintiffs' federally secured rights under the IRC in violation of 42 U.S.C. § 1983.

The matter is now before the court on defendants' motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(1) and 12(b)(6) for alleged lack of subject matter jurisdiction and alleged failure to state a claim upon which relief can be granted. For the reasons stated below, defendants' motion to dismiss is granted.

I.

A motion to dismiss under Rule 12(b)(1) raises the question of the court's subject matter jurisdiction, its authority or competence to hear and decide a case. When a motion is based on more than one ground, the court should consider the Rule 12(b)(1) challenge first since, if it must dismiss the complaint for lack of subject matter jurisdiction, the other defenses and objections become moot and need not be determined. In deciding the Rule 12(b)(1) motion, which challenges the actual existence rather than the sufficiency of the allegations of subject matter jurisdiction, the general rule is that a pleading's allegations of jurisdiction are taken as true unless denied or controverted by the movant. Once denied or controverted by the movant, however, the allegations of the complaint are not controlling and are merely evidence. Wright & Miller, Federal Practice & Procedure: Civil §§ 1350, 1363.

Defendants claim that this court lacks subject matter jurisdiction over both counts of plaintiffs' complaint because the Eleventh Amendment of the United States Constitution bars an action against the State, its departments, agencies and officials, absent an express waiver of sovereign immunity by the State. Although the State of Michigan has not been expressly named as a defendant, plaintiffs have sued the MDCS and the MCSC, the MCSC being a legislatively created agency of the State of Michigan, which sets policy for the MDCS.

"Because of the problems of federalism inherent in making one sovereign appear against its will in the courts of the other," the United States Supreme Court has long viewed the Eleventh Amendment as an appropriate restriction on the exercise of federal judicial power. Employees v. Missouri Public Health & Welfare Dept., 411 U.S. 279, 294, 93 S.Ct. 1614, 1622, 36 L.Ed.2d 251 (1973). Current law on the interpretation and scope of the Eleventh Amendment was recently catalogued by the Supreme Court in Pennhurst State School and Hospital v. Halderman, 465 U.S. 89, 104 S.Ct. 900, 79 L.Ed.2d 67 (1984), as follows:

"This Court's decisions thus establish that `an unconsenting State is immune from suits brought in federal courts by her own citizens as well as by citizens of another state.' Employees, supra, 411 U.S., at 280, 93 S.Ct., at 1616. There may be a question, however, whether a particular suit in fact is a suit against a State. It is clear, of course, that in the absence of consent a suit in which the State or one of its agencies or departments is named as the defendant is proscribed by the Eleventh Amendment. See, e.g., Florida Department of Health v. Florida Nursing Home Assn., 450 U.S. 147, 101 S.Ct. 1032, 67 L.Ed.2d 132 (1981) (per curiam); Alabama v. Pugh, 438 U.S. 781, 98 S.Ct. 3057, 57 L.Ed.2d 1114 (1978) (per curiam). This jurisdictional bar applies regardless of the nature of the relief sought. See, e.g., Missouri v. Fiske, 290 U.S. 18, 27, 54 S.Ct. 18, 21, 78 L.Ed. 145 (1933) (`Expressly applying to suits in equity as well as at law, the Amendment necessarily embraces demands for the enforcement of equitable rights and the prosecution of equitable remedies when these are asserted and prosecuted by an individual against a State')."

104 S.Ct. at 908. In addition to those general principles, the Supreme Court has expressly ruled that an unconsenting state cannot be joined as a defendant to a 42 U.S.C. § 1983 action because of the state's eleventh amendment immunity. See Alabama v. Pugh, 438 U.S. 781, 98 S.Ct. 3057, 57 L.Ed.2d 1114 (1978), and Quern v. Jordan, 440 U.S. 332, 99 S.Ct. 1139, 59 L.Ed.2d 358 (1979). Furthermore, this court has recently held that the Michigan Public Service Commission, as an integral state agency, is entitled to the same immunity as the state itself, ANR Pipeline Co. v. Michigan Public Service Commission, 608 F.Supp. 43 (W.D.Mich.1984), and it follows that the MDCS, as an arm of the state, and the MCSC, as an integral state agency, are also entitled to...