1. finance
2. personal finance
3. financial planning
4. retirement and pension

WHAT IS ERISA AND WHY
SHOULD YOU CARE?
WHAT EVERY EMPLOYMENT
ATTORNEY NEEDS TO KNOW
ABA/LEL Annual CLE—September 11, 2008
Denver, Colorado
Denise M. Clark, Esq. Washington, DC
Margo Hasselman, Esq. Oakland, CA
EMPLOYEE BENEFITS
| At
the core of employer and employee
relationships is compensation and
benefits.
| Employee benefits include pensions in the
form of defined benefit plans, 401(k)
plans, cash-balance plans, profit sharing
plans, and other deferred compensation
plans.
plans
EMPLOYEE BENEFITS
| Employee
benefit plans also include:
y healthcare
y severance, and
d
y disability plans
PRE-ERISA LAWS
| Railroad
Retirement Act (1933 & 1935)
| Internal Revenue Code
| Labor Management Relations Act (LMRA
or Taft-Hartley Act) (1947) and other
labor laws
| Welfare and Pension Plan Disclosure
Act(1958)
| Various state and local laws
THE EMPLOYEE RETIREMENT INCOME
SECURITY ACT--ERISA
| ERISA
governs “any
any plan, fund, or
program which was heretofore or
hereafter established or maintained by an
“employer” for the purpose of providing
benefits to employees.
| ERISA does not cover government plans,
church plans, plans covering the selfinsured unfunded excess
insured,
e cess plans
plans, or plans
maintained to comply with unemployment
workers’ compensation or disability
workers
insurance laws.
OVERVIEW OF ERISA
Title I – “Protection of Employee
p y rights”
g
– the
Labor Title
| Title II – Amendments to the Internal Revenue
C d
Code
| Title III – Administrative and Judicial Title
| Title IV – Establishment of Pension Plan
Termination Insurance Program
|
THERE MUST BE A “PLAN”
| The
courts generally have utilized a four
fourpart test to determine whether the
statutory “plan, fund or program”
requirement has been met—a plan exists
if, from the surrounding circumstances, a
reasonable
bl person could
ld ascertain
t i the
th
intended (1) benefits, (2) beneficiaries, (3)
source of financing,
financing and (4) procedures for
obtaining benefits. Donovan v.
Dillingham,
g
, 688 F.2d 1367,, 1373 (11th
(
Cir. 1982)
THE EMPLOYER MUST SPONSOR THE
PLAN
| To
be an employee benefit plan subject to
ERISA, the plan, fund or program must
also be “established or maintained” by an
employer or employee organization.
ERISA §§ 3(1) and 3(2)(A), 29 U.S.C. §§
1002(1) and
d 1002(2)(A)
1002(2)(A).
| This requirement requires a minimum
le el of emplo
level
employer
er in
involvement
ol ement (or
involvement effectuated through a third
party) for an arrangement to constitute an
ERISA plan.
PLAN IS ESTABLISHED TO PROVIDE
BENEFITS TO EMPLOYEES
To be an ERISA-covered employee
p y benefits p
plan,,
the plan must provide benefits to “employees” or
their beneficiaries. ERISA §§ 3(1), 3(2)(A) and
3(7) 29 U
3(7),
U.S.C.
S C §§ 1002(1),
1002(1) 1002(2)(A),
1002(2)(A) and
1002(7).
| No definition of employee under ERISA.
| Nationwide Mutual Ins. Co. v. Darden, 503 U.S.
318, 327 (1992)—test for employee status
|
THERE MUST BE AN ADMINISTRATIVE
PROCESS
To constitute an employee
p y benefit p
plan subject
j
to
ERISA, the arrangement generally must involve
ongoing administrative responsibility to
determine eligibility,
eligibility calculate benefit levels,
levels and
monitor funding for benefit payments.
| Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 11
(1987)—a single event/payment does not
constitute an administrative scheme.
|
RETIREMENT BENEFIT PLANS GOVERNED
BY ERISA
|
ERISA Section 3(2)
( ) defines an employee
p y p
pension
benefit plan as—
y any plan, fund or program established or
maintained
i t i d by
b an employer,
l
employee
l
organization, or both, providing retirement
income to employees, or resulting in a deferral
of income by employees for periods extending
to the termination of covered employment and
beyond regardless of the method of calculating
the benefit under the plan or the method of
distributing benefits from the plan.
TYPES OF PENSION PLANS
|A
defined
f
benefit
f p
plan p
promises a defined
monthly benefit at retirement, such as 3
percent of final pay per year of service. A
plan’s
la ’ actuary
act ary calculates
calc late ho
how much
ch money
o e
employers must contribute in order to
fund the p
plan’s p
promised benefits.
| Because benefits must be “definitely
determinable,” a defined benefit plan
mustt provide
id b
benefits,
fit whether
h th or nott an
employer meets its obligation to pay
contributions under a collective
bargaining agreement.
TYPES OF PENSION PLANS
|A
defined contribution plan sets up an
individual account for each plan
participant. Defined contribution plans
pay benefits based solely on the amounts
contributed to the employee’s account plus
any income,
i
earnings,
i
expenses, losses,
l
or
forfeitures, which are allocated to the
employee’ss account.
employee
account
DEFINED BENEFIT PLANS
PLAN TYPE
DESCRIPTION
BENEFIT
CHARACTERISTICS
FUNDING CHARACTERISTICS
Defined Benefit
The employer agrees to provide
the employee a guaranteed
benefit amount at retirement
based on a specified formula.
Usually,
y, the benefit is tied to
the employee’s earnings,
length of service, or both. The
employer is typically the only
party that contributes to the
plan and individual accounts
plan,
are generally not maintained.
Rewards longer-term
employee, as the longer an
employee remains with an
employer, the greater the
retirement benefit.
The employer bears the risk of providing
the guaranteed benefit at retirement
(e.g., unknown cost of capital, unknown
number of future vested employees,
unknown future g
government regulatory
g
y
environment, unknown future employee
pay levels).
Usually distributes a
vested benefit as a stream
of level monthly payments
for life (an annuity) or for
some stated period
beginning at the time the
employee retires early, at
the normal age, or later.
Must use actuarial projections that take
into account the future number of
employees, ages, life span, earnings, and
other demographic characteristics.
Employer must satisfy both minimum
and maximum funding standards.
Sometimes, employers will
Sometimes
voluntarily grant periodic
benefit increases after
retirement to help offset
inflationary effects.
Employer must calculate and pay
insurance premiums to the Pension
Benefit Guaranty Corp. to protect
pension benefits in the event of plan
termination.
May offer disability and
death benefits.
Employer must contribute a minimum
amount to fund the future benefit, for
which a tax deduction is allowed
Can be coupled with
accounts providing retiree
health benefits.
TYPES OF DEFINED BENEFIT FORMULAS
PLAN TYPE
DESCRIPTION
flat-benefit formula
This formula pays a flat dollar amount for each year of service recognized
under the plan.
unit-benefit
unit
benefit formula
This formula expresses benefits as a fixed amount or percentage for each of
the employee’s years of service with the employer.
flat-percentage
formula
This formula pays a benefit based on a percentage of the employee’s average
earnings prior to retirement.
career
average formula
Under the first type of career average formula, participants earn a
percentage of the pay recognized for plan purposes in each year they are
plan participants. The second type of career-average formula averages the
participant’s yearly earnings over the period of plan participation. At
retirement, the benefit equals a percentage of the career-average pay,
multiplied by the participant’s number of years of service.
final-pay
formula
The most costly defined benefit formula. This formula bases benefits on
average earnings during a specified number of years at the end of a
participant’s career. The benefit equals a percentage of the participant’s final
average earnings, multiplied by the number of years of service. This formula
provides pre-retirement inflation protection to the participant, but can
represent a higher cost to the employer.
employer
A participant’s earnings are presumed highest at retirement; therefore, the
formula protects the participant against inflation.
DEFINED CONTRIBUTION PLANS
PLAN TYPE
DESCRIPTION
BENEFIT
CHARACTERISTICS
FUNDING
CHARACTERISTICS
Defined
Contribution
The employer makes
contributions to an account
established for each
participating employee. The
final benefit reflects the total of
employer contributions, any
employee contributions, and
investment gains or losses.
Employee controls the level
of funding and has
immediate ownership of
earnings associated with
his contributions.
contributions
Employer generally knows the
plan cost on a yearly basis.
Once vested, employee owns
the benefit (i.e., he may
often take the benefit, roll it
over into a IRA,, and receive
investment earnings).
Employer can pass on
reasonable costs of
administration.
Seniority does not play a
significant a role in funding the
plan, although as wages
The level of future retirement
increase employee contributions
benefits cannot be calculated
tend to increase, and
exactly in advance. Often, the Generally, easier for
corresponding employer
contributions are based on a
employees to understand
matching contributions may
percentage of participant salary (individual accounts usually increase, depending on plan
or of company profits
profits. They
have known values
design.
may also be designed to include expressed in dollars rather
Employer is not subject to
pretax or after-tax employee
than benefit formula).
pension insurance program
contributions, which may be
.Portability permits
since plans are fully funded
voluntary or mandatory.
employee
l
to
t rollover
ll
and
d
( l easier
(also
i to
t terminate
t
i t plan).
l )
consolidate defined
Employer contributions are a
contribution plans into
tax deductible business expense
other defined contribution
in the year paid to a
plans, depending on plan
participant’ss account
participant
rules..
May offer disability and
death benefits.
TYPES OF DEFINED CONTRIBUTION PLANS
PLAN TYPE
DESCRIPTION
PLAN CHARACTERISTICS
money
purchase
Employer contributions are
mandatory and are usually
stated as a percentage of
employee salary.
Usually pays a vested employee’s individual account balance in full upon
death employment termination,
death,
termination retirement,
retirement or disability.
disability
Offers employees a chance to share in the success of the company.
profit-sharing Total contributions are often
derived from a portion of
company profits.
fi
stock bonus
Contributions and benefit
payments are usually in the form
of company stock (instead of
profits).
target benefit This is a cross between a defined
benefit plan and a money
purchase plan. A targeted
benefit is used to determine the
level of contributions but with
contributions allocated to
accounts as in a money purchase
plan.
savings
Usually pays a vested employee’s individual account balance in full upon
death, employment termination, retirement, or disability.
Employer contributions are not required.
Employee participation incentive.
401(k)
An employee can elect to
contribute, on a pretax basis, a
portion of current compensation
to an individual account, thus
deferring current income tax on
the contribution and the
investment income earned.
Employee elective contributions to the plan are immediately vested, which is
beneficial to workers who change jobs frequently and intermittent workers.
When employees terminate employment, they may roll over accumulated
contributions to an IRA or another qualified plan.
WELFARE BENEFIT PLANS GOVERNED BY
ERISA
|
ERISA Section 3(1)
( ) defines an employee
p y welfare
benefit plan as—
y any plan, fund or program established or
maintained
i t i d by
b an employer,
l
employee
l
organization, or both, providing participants
and beneficiaries (through insurance, or
otherwise) medical, surgical or hospital care;
or, benefits in the event of sickness, accident,
disability death,
disability,
death unemployment; or,
or vacation
benefits, apprenticeship or other training
programs, or day care centers, scholarship
f d or prepaid
funds
id legal
l
l services.
i
WELFARE BENEFIT PLANS GOVERNED BY
ERISA
ERISA g
governs funded p
plans subject
j
to trust
arrangements;
| May be insured or self-insured;
| Funding arrangements include VEBAs OR 401(h)
accounts;
| Most single-employer
single employer plans are unfunded
unfunded, and
are instead paid out of the general assets of the
employer)
| Multiemployer plans generally provide benefits
through a trust arrangement
|
WELFARE PLANS NOT GOVERNED BY
ERISA
|
DOL has excluded certain “payroll
p y
p
practices”
from the definition of a welfare plan (29 CFR §
2510.3-1(b))
y Overtime
O ti
pay, shift
hift premiums,
i
holiday
h lid
premiums, weekend premiums
y Short term disability paid out of employer
employer’ss
general assets
y Vacation and holidays paid out of general
assets
t
y Military duty, jury service, training, sabbatical
TYPES OF WELFARE PLANS
TYPE OF PLAN
Governed by ERISA Plan, If Provided Through a Plan Maintained by an Employer
Group Health Plans
Insured or self-insured arrangements; typically contract with managed care
organizations that provide various benefit designs, hospital, physician networks, and
pharmaceutical coverage for small and large groups. Some arrangements include
claims payment, communications, and appeal review, although many large employers
will
ill retain
t i those
th
tasks.
t k
Disability Insurance
Short-term and Long-term arrangements covering employees during periods when they
cannot work. Often short-term insurance coverage will provide coverage during time
periods prior to eligibility for long-term coverage. Short-term typically used to
pregnancy
p
g
yp
periods or p
periods following
g major
j surgery.
g y If p
paid out of the employer’s
p y
general assets, not a plan
Long-term disability typically covers periods following the exhaustion of short-term
coverage during which the individual is disabled and unable to perform their job;
additional coverage if the individual cannot perform any job.
Employee Assistance
Program
Provides assistance in dealing with major personal problems affecting mental and
physical health, including problems such as substance abuse, stress, depression, marital
and family problems, and legal problems may or may not be an ERISA plan. An EAP is
considered an employee welfare benefit plan to the extent that it provides “medical
benefits” or “benefits in the definition of a welfare benefit plan.”
p
Multiple employer welfare Typically sponsored by trade or business associations, providing benefits described in
arrangement (MEWA)
ERISA §3(1) to employees of two or more employers (including one or more selfSec.
employed individuals). Excludes plans established or maintained pursuant to bona fide
3(40)
collective bargaining agreements and plans of rural electric cooperatives.
Severance Plans
Severance programs involving an ongoing administrative scheme generally are
considered welfare plans subject to ERISA.
REMEDIES UNDER ERISA
|
|
|
|
ERISA Section 502(a)(1)(A)—relief for
administrator’s failure to supply requested
information.
ERISA Section 502(a)(1)(B)—recover benefits due
under the terms of the plan or to enforce or clarify
rights under the plan.
plan
ERISA Section 502(a)(2)—to make good losses to a
plan due to a breach of fiduciary duty – the fiduciary
pays money to the plan to put it in the position it
would have occupied if the breach had not occurred.
ERISA
S Section
S ct o 502(a)(3)—often
50 (a)(3) o e referred
e e e too as a
“catchall” provision, it permits an award of “other
appropriate equitable relief” where ERISA’s other
remedial provisions are not available
WHAT IS EQUITABLE RELIEF
UNDER ERISA
|
|
Mertens v. Hewitt Assocs., 508 U.S. 248 (1993).
The Supreme Court held that the term “equitable
relief” in §502(a)(3) refers to “those categories of relief
that were typically available in equity.” Those typical
f
forms
off relief
li f were “injunction,
“i j
ti
mandamus,
d
and
d
restitution” but not damages.
Great-West Life & Annuity Ins. Co. v. Knudson,
534 U.S.
U S 204 (2002)
(2002). Reaffirmed
R ffi
d Mertens’
M t ’ holding
h ldi
that equitable relief means those forms of relief
typically available in equity. The Court also
distinguished between equitable restitution -- which
is designed to redress, by constructive trust or
equitable lien, a wrongful “taking” of the plaintiff’s
property -- and legal restitution, which is a form of
personal liability for damages.
IS § 502(A)(2) AVAILABLE TO RESTORE
LOSSES TO A SINGLE ACCOUNT?
| LaRue
v. DeWolff, Boberg &
Associates, Inc.:
y
y
y
LaRue participated in his employer’s 401(k)
plan, which allowed each participant to direct
investment of the assets held for his or her
accountt among various
i
alternatives.
lt
ti
LaRue directed the plan administrator (the
employer) to change his account’s investment
allocation,
ll
ti
b t th
but
the administrator
d i i t t ffailed
il d to
t d
do
so, causing his account to lose about $150,000.
LaRue sued the employer to restore his
account to the value it would have been if his
instructions had been followed.
| Issue:
under?
d ?
what ERISA section can LaRue sue
IS § 502(A)(2) AVAILABLE TO RESTORE
LOSSES TO A SINGLE ACCOUNT?
| LaRue
sued under § 502(a)(2),
( )( ), asking
g for his
account in the plan to be made whole.
y
y
The employer argued that he couldn’t use §
502(a)(2) beca
because
e his
hi lawsuit
la
it wouldn’t
o ld ’t iinure
e to the
benefit of any other plan participants.
Before LaRue, lots of defendants made this
argument against lawsuits brought for
f losses to a
defined contribution plan that didn’t affect every
participant.
| Supreme
Court says: a loss due to a breach
that only affects one account is still a loss to
the plan.
plan LaRue can use § 502(a)(2).
502(a)(2)
WHY DOES THAT MATTER?
If the Court had found it wasn’t restoring a loss
to the plan, LaRue’s case would be stuck in the
catchall § 502(a)(3).
502(a)(3)
“catchall”
| § 502(a)(3) remedies are limited to injunctions
and “traditional equitable remedies,” according to
older
ld Supreme
S
Court
C
t cases.
|
y
|
The Supreme Court hasn’t explained what it meant by
“traditional equitable remedies,” and the lower courts
have struggled to figure out what counts.
counts
The courts have been reluctant to grant relief
that involves money changing hands, although
some have
h
occasionally
i
ll found
f
d a way.
y
See, e.g., Mathews v. Chevron Corp., 362 F.3d 1172 (9th
Cir. 2004) (reinstating participants into a pension plan,
allowing them to receive monetary benefits from plan,
plan
based on misrepresentations by employer).
OTHER LARUE ISSUES
| Concurrence
suggests LaRue should have
sued u
under
de § 50
502(a)(1)(B)
(a)( )( ) for
o be
benefits
e ts
under the terms of the plan.
y
Problem: the plan no longer had the money.
| The
Court also suggested, in a footnote,
that it would reject the argument that
participants in a DC plan who have taken
out their account balance – even if they
argue it
i was improperly
i
l reduced
d
d by
b
fiduciary misconduct – lack standing
because they are no longer “participants.”
participants.
ROLE OF EMPLOYEE BENEFIT PLANS AND
ERISA IN EMPLOYMENT LITIGATION
|
In many
y instances employee
p y benefits p
play
ya
central role in the structure of settlements or the
determination of damages in employment
litigation.
litigation
For example, severance as a remedy in a wrongful
termination or discrimination claim. Understanding
th whether
the
h th there
th
is
i a payroll
ll practice
ti or a funded
f d d
plan will assist in evaluating the strength or
weakness of the claim, or the complexity of securing a
severance benefit.
b
fit
y Is it a potential remedy you can pursue outside of
ERISA’s framework?
y
ROLE OF EMPLOYEE BENEFIT PLANS AND
ERISA IN EMPLOYMENT LITIGATION
|
Some claims contain hidden g
gems or p
potential
bombs depending on which side of the case one
sits.
An employer’s
A
l
’ ffailure
il
to
t send
d outt a COBRA notice
ti
when terminating an employee, triggering daily
penalties under ERISA;
y An
A employer’s
l
’ ffailure
il
to pay overtime
i
may open the
h
door to claims of failure to properly fund a pension
benefit;
y An employer’s failure to pay insurance premiums on
promised benefits without a notice of plan
termination.
y
GATHER THE FACTS
|
Ask y
your clients for the basic materials
y
y
y
y
y
y
y
y
y
Plan documents
Insurance policies
E l
Employee
h
handbooks
db k
Summary plan descriptions
Participant/employee
p
p y communications about benefits
401(k) statements
Plan letters denying benefit claims
A
Appeal
l lletters
tt
Service provider contracts
CONCLUSION
Understanding
g ERISA can enhance the
employment claim or defense.
| Keeping benefit plans in mind when fashioning a
settlement
ttl
t can assist
i t your client.
li t
| Remedies in litigation remain limited, but the
landscape continues to change and the ERISA
claim should never be avoided or disregarded.
|