Consolidated Omnibus Budget Reconciliation Act (“COBRA”)

When an employee is terminated, they may find themselves without health insurance coverage. To assist individuals in this situation, the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) was enacted.[1] COBRA requires employers who maintain group health plans to offer employees and their family members the opportunity to pay for continued coverage under the employer’s health plan for a certain period of time.[2] 96 Though the premium charged for COBRA health coverage is generally higher than the premium charged to employed individuals.. By giving the former employees and their families a choice whether or not to continue health coverage under COBRA, the Act assists individuals who may need continued health insurance coverage while they attempt to make alternate arrangements for coverage. COBRA applies to any employers that maintain a health plan for more than 20 employees.[3]

Coverage

The coverage must consist of coverage which, as of the time the coverage is being provided, is identical to the coverage provided under the plan to similarly situated beneficiaries under the plan.[4] Typically, the coverage may extend for 18 months for terminations or reductions in hours.[5] This time may be extended upon the death of the covered employee, divorce or legal separation of the covered employee, a dependent child ceasing to be a dependent child under the plan.[6] COBRA is also available for 36 months after the death of the covered employee. [7] The period of coverage may end if the employer stops providing health care to all employees or the employee fails to pay the premium. Additionally, the plan may require payment of a premium for any period of continuation coverage, except that such premium (A) shall not exceed 102 percent of the applicable premium for such period, and (B) may, at the election of the payor, be made in monthly installments.[8]

Notice

Generally, an employer has 30 days to notify the administrator of plan. The administrator must provide written notice to the covered individual. However given the type of qualifying event, different notices may be required.[9]

Enforcement

The DOL and the IRS are responsible for enforcing COBRA and its regulations. The IRS may impose excise taxes on employers for COBRA violations of up to $100 per day per qualified beneficiary, or up to $200 per day if more than one qualified beneficiary is involved.[10] To the extent violations by the employer (or the plan in the case of a multiemployer plan) for any year are more than de minimis, a tax of “$15,000” may be imposed. Even an unintentional failure to comply with COBRA can result in an excise tax of up to $500,000 in total.[11]

 

Mini-Cobra

Utah is one of several states that have adopted a mini-COBRA scheme.[12] Under Utah statue a covered employee of an employer with less than 20 employees may extend coverage for 12 months. The Utah Mini-Cobra closely tracks COBRA in most other significant aspects.

[1] 29 USC § 1161 et seq.

[2] 29 USC § 1161.

[3] Id.

[4] 29 USC § 1162.

[5] Id.

[6] 29 USC § 1163.

[7] Id.

[8] Id.

[9] 29 USC § 1166

[10] 26 U.S.C. § 4980B(b)(l).

[11] 26 U.S.C. § 4980B(c)(4)(A).

[12] Utah Code Ann. § 31A-22-

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Worker Adjustment and Retraining Notification Act (“WARN”)

In 1988 Congress passed the Worker Adjustment and Retraining Notification Act (“WARN”).[1] WARN provides protection to workers, their families and communities by requiring employers to provide notification 60 calendar days in advance of plant closings and mass layoffs. Advance notice provides workers and their families some transition time to adjust to the prospective loss of employment, to seek and obtain alternative jobs and, if necessary, to enter skill training or retraining that will allow these workers to successfully compete in the job market. WARN also provides for notice to State dislocated worker units so that dislocated worker assistance can be promptly provided.[2]

 

WARN applies to employers with more than 100 employees (part-time excluded), or 100 or more employees who in the aggregate work at least 4,000 hours per week. WARN requires at least 60 day notice to employees before plant closings and mass layoffs.[3] Note that under certain circumstances, less than 60 days notice may be permitted.[4] In other words, WARN requires employers who are planning a plant closing or a mass layoff to give affected employees at least 60 days’ notice of such an employment action. While the 60-day period is the minimum for advance notice, this provision is not intended to discourage employers from voluntarily providing longer periods of advance notice. Not all plant closings and layoffs are subject to the Act, and certain employment thresholds must be reached before the Act applies. WARN sets out specific exemptions, and provides for a reduction in the notification period in particular circumstances. Damages and civil penalties can be assessed against employers who violate the Act.[5]

 

A plant closing is defined as “the permanent or temporary shutdown of a single site of employment, or one or more facilities or operating units within a single site of employment, if the shutdown results in an employment loss at the single site of employment during any 30-day period for 50 or more employees excluding any part-time employees”[6]

 

WARN also defines mass layoffs as a reduction in force which (A) is not the result of a plant closing; and (B) results in an employment loss at the single site of employment during any 30-day period for (1) at least 33 percent of the employees (excluding any part-time employees); and at least 50 employees (excluding any part-time employees); or (2) at least 500 employees (excluding any part-time employees)[7]

 

WARN includes two notable exceptions. It does not apply (1) to the closing of a temporary facility or layoffs which are the result of the completion of a particular project and the employees were hired with the understanding that their employment was limited to the duration of the facility or the project, or (2) the closing or layoff constitutes a strike or constitutes a lockout not intended to evade the requirements of WARN.[8]

 

Notice Requirements

Under WARN, notices must be specific. For employees that have a representative, it must contain:

 

(1) The name and address of the employment site where the plant closing or mass layoff will occur, and the name and telephone number of a company official to contact for further information;

 

(2) A statement as to whether the planned action is expected to be permanent or temporary and, if the entire plant is to be closed, a statement to that effect;

 

(3) The expected date of the first separation and the anticipated schedule for making separations;

 

(4) The job titles of positions to be affected and the names of the workers currently holding affected jobs.

 

The notice may include additional information useful to the employees such as information on available dislocated worker assistance, and, if the planned action is expected to be temporary, the estimated duration, if known.[9]

 

For an employee that does not have a representative, notice must be written in language understandable to the employee and contain:

 

(1) A statement as to whether the planned action is expected to be permanent or temporary and, if the entire plant is to be closed, a statement to that effect;

 

(2) The expected date when the plant closing or mass layoff will commence and the expected date when the individual employee will be separated;

 

(3) An indication whether or not bumping rights exist;

 

(4) The name and telephone number of a company official to contact for further information.

 

The notice may include additional information useful to the employees such as information on available dislocated worker assistance, and, if the planned action is expected to be temporary, the estimated duration, if known.[10]

 

Additionally, notice must be provided to the state’s dislocated worker unit and the chief elected official of the local government. This notice must contain:

 

(1) The name and address of the employment site where the plant closing or mass layoff will occur, and the name and telephone number of a company official to contact for further information;

 

(2) A statement as to whether the planned action is expected to be permanent or temporary and, if the entire plant is to be closed, a statement to that effect;

 

(3) The expected date of the first separation, and the anticipated schedule for making separations;

 

(4) The job titles of positions to be affected, and the number of affected employees in each job classification;

 

(5) An indication as to whether or not bumping rights exist;

 

(6) The name of each union representing affected employees, and the name and address of the chief elected officer of each union.[11]

 

Notice may be served by any reasonable method of delivery which is designed to ensure receipt of notice of least 60 days before separation is acceptable (e.g., first class mail, personal delivery with optional signed receipt). In the case of notification directly to affected employees, insertion of notice into pay envelopes is another viable option. A ticketed notice, i.e., preprinted notice regularly included in each employee’s pay check or pay envelope, does not meet the requirements of WARN.[12]

 

Enforcement

Failure to provide the notice to employees subjects the employer to liability to each aggrieved employee and may include compensation for (A) back pay for each day of violation at a rate of compensation not less than the higher of (i) the average regular rate received by such employee during the last 3 years of the employee’s employment; or (ii) the final regular rate received by such employee; and (B) benefits under an employee benefit plan described in section 1002(3) of this title, including the cost of medical expenses incurred during the employment loss which would have been covered under an employee benefit plan if the employment loss had not occurred. Such liability shall be calculated for the period of the violation, up to a maximum of 60 days, but in no event for more than one-half the number of days the employee was employed by the employer.[13] In such an action, the employees are also able to recover their attorney’s fees.[14]

 

Failure to provide the notice to state and local officials includes a civil penalty of not more than $500 for each day of the violation.[15]

[1] 29 USC §§ 2101 et seq.

[2] 20 CFR 639.1

[3] 29 USC § 2102 (a)

[4] 29 USC § 2102 (b)

[5] 20 CFR 639.2

[6] 29 USC § 2101(2)

[7] 29 USC § 2101(3)

[8] 29 USC § 2103

[9] 20 CFR § 639.7

[10] Id.

[11] Id. Note also that the employer may alternatively provide a written notice stating the name of address of the employment site where the plant closing or mass layoff will occur; the name and telephone number of a company official to contact for further information; the expected date of the first separation; and the number of affected employees.

[12] 20 CFR § 639.8

[13] 29 USC § 2104

[14] Id.

[15] Id.

Affordable Care Act (“ACA”)

The Patient Protection and Affordable Care Act (“ACA”) was enacted in 2010. This act is also known as Obamacare. From its inception, the ACA has been controversial and either praised or scorned by various political parties. The ACA was challenged on numerous constitutional grounds, but was ultimately upheld in a 6 to 3 decision by the United States Supreme Court.[1]

The following are among the better known provisions of the ACA:

  • Dependent care extended to the age of 26;
  • Insurers may not cancel policies when policy holders become ill;
  • Created state health insurance exchanges;
  • Prohibits lifetime monetary limits on hospital stays;
  • Insurers may not deny coverage to individuals based on pre-existing conditions;
  • Created an individual mandate requiring all individuals, with some exceptions, to have health insurance or pay a tax penalty;
  • Expanded medicated;
  • Provided certain subsidies;
  • Established minimum standards for health insurance policies;
  • Placed time limits on amount of time employers could require for health insurance eligibility;
  • Provided for certain small business tax credits;
  • Created penalty for large employers who do not provide health insurance for full-time employees.

A greater explanation on how certain provisions of the ACA affect employers follows.

Coverage

The ACA’s mandate only applies employers that employ an average of 50 or more full-time employees per month for a calendar year; this includes full-time equivalent employees.[2] If the employer is large based on its calculation at the beginning of a calendar year, it will remain large for that entire calendar year.[3] An employer’s number of full-time employees is calculated by adding the employer’s full-time employees to its full-time equivalent employees for each month of the prior calendar year.[4] A full-time employee is defined as an employee who, that averages at least 30 hours a week for a calendar month.[5] Full-time equivalent employees are calculated by taking the aggregate number of hours worked by part-time employees in a month (up to a maximum of 120 hours per employee) and dividing by 120.44.[6] For example, an employer whose part time employees worked 2000 hours in a month would have 17 full-time equivalent employees.[7]

ACA’s Mandate Provisions

            As noted above, a large employer (over 50 full-time employees) must provide minimum essential coverage.[8] The ACA defines “minimum essential coverage meaning any of the following:

(A) Government sponsored programs.–Coverage under–

(i) the Medicare program under part A of title XVIII of the Social Security Act,

(ii) the Medicaid program under title XIX of the Social Security Act,

(iii) the CHIP program under title XXI of the Social Security Act,

(iv) medical coverage under chapter 55 of title 10, United States Code, including coverage under the TRICARE program;

(v) a health care program under chapter 17 or 18 of title 38, United States Code, as determined by the Secretary of Veterans Affairs, in coordination with the Secretary of Health and Human Services and the Secretary,

(vi) a health plan under section 2504(e) of title 22, United States Code (relating to Peace Corps volunteers); or

(vii) the Nonappropriated Fund Health Benefits Program of the Department of Defense, established under section 349 of the National Defense Authorization Act for Fiscal Year 1995 (Public Law 103-337; 10 U.S.C. 1587 note).

(B) Employer-sponsored plan.–Coverage under an eligible employer-sponsored plan.

(C) Plans in the individual market.–Coverage under a health plan offered in the individual market within a State.

(D) Grandfathered health plan.–Coverage under a grandfathered health plan.

(E) Other coverage.–Such other health benefits coverage, such as a State health benefits risk pool, as the Secretary of Health and Human Services, in coordination with the Secretary, recognizes for purposes of this subsection.[9]

The ACA further defines eligible employer-sponsored plan as follows:

The term “eligible employer-sponsored plan” means, with respect to any employee, a group health plan or group health insurance coverage offered by an employer to the employee which is–

(A) a governmental plan (within the meaning of section 2791(d)(8) of the Public Health Service Act), or

(B) any other plan or coverage offered in the small or large group market within a State.

Such term shall include a grandfathered health plan described in paragraph (1)(D) offered in a group market.[10]

Practically, employer sponsored plans must cover at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan; this is known as the minimum value requirement.[11]

The ACA also includes affordability requirements. Employer-provided coverage is considered affordable for an employee if the employee required contribution is no more than 9.69 percent (as adjusted) of that employee’s household income in 2017.[12]

Because employers are not likely to know the household income of their employees, there are three safe harbors that an employer may use to determine affordability for purposes of the employer shared responsibility provisions.  (These safe harbors do not affect whether an employee’s coverage is affordable for purposes of determining the employee’s eligibility for the premium tax credit.)  In general, under these employer shared responsibility affordability safe harbors, employers are allowed to use Form W-2 wages, an employee’s rate of pay, or the federal poverty line, instead of household income in making the affordability determination.[13]

The IRS has provided additional guidance regarding these safe harbors.

The three affordability safe harbors are (1) the Form W-2 wages safe harbor, (2) the rate of pay safe harbor, and (3) the federal poverty line safe harbor.  An ALE may use one or more of the safe harbors at its option but only if the ALE offers 95 percent of its full-time employees and their dependents the opportunity to enroll in coverage that provides minimum value for the self-only coverage offered to the employee.  An ALE may choose to use one safe harbor for all of its employees or to use different safe harbors for employees in different categories, provided that the categories used are reasonable and the employer uses one safe harbor on a uniform and consistent basis for all employees in a particular category.  If an ALE offers multiple health care coverage options, the affordability test for a particular employee applies to the lowest-cost self-only coverage option that provides minimum value and that is available to that employee.

The Form W-2 wages safe harbor generally is based on the amount of wages paid to the employee that the employer reports in Box 1 of that employee’s Form W-2.  The rate of pay safe harbor generally is based on the employee’s rate of pay at the beginning of the coverage period, with adjustments permitted, for an hourly employee, if the rate of pay is decreased (but not if the rate of pay is increased).  The federal poverty line safe harbor generally treats coverage as affordable for a month if the employee required contribution for the month does not exceed 9.5 percent, adjusted annually, of the federal poverty line for a single individual for the applicable calendar year, divided by 12.  The final regulations provide additional information on these affordability safe harbors. [14]

Enforcement

On January 20, 2017, President Trump signed an executive order aimed at minimizing the enforcement of the ACA. In relevant part the Executive Order states:

To the maximum extent permitted by law, the Secretary of Health and Human Services (Secretary) and the heads of all other executive departments and agencies (agencies) with authorities and responsibilities under the Act shall exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications. [15]

Notwithstanding this executive order, for a “large employer,” penalties are triggered for any month that a full-time employee purchases a qualified health plan on an exchange and is paid or entitled to a “premium tax credit” or “cost-sharing reduction”[16] For large employers, penalties under the mandate are real-time, meaning that if any full-time employee is not offered coverage in a month, a penalty could be assessed regardless of whether the employee was full-time in a prior month.[17] Specifically, the regulation provides:

If an applicable large employer member fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan for any calendar month, and the applicable large employer member has received a Section 1411 Certification with respect to at least one full-time employee, an assessable payment is imposed. For the calendar month, the applicable large employer member will owe an assessable payment equal to the product of the section 4980H(a)[18] applicable payment amount and the number of full-time employees of the applicable large employer member (other than employees in a limited non-assessment period for certain employees and as adjusted in accordance with paragraph (e) of this section). For purposes of this paragraph (a), an applicable large employer member is treated as offering such coverage to its full-time employees (and their dependents) for a calendar month if, for that month, it offers such coverage to all but five percent (or, if greater, five) of its full-time employees (provided that an employee is treated as having been offered coverage only if the employer also offers coverage to that employee’s dependents). For purposes of the preceding sentence, an employee in a limited non-assessment period for certain employees is not included in the calculation.[19]

 

26 CFR 54.4980H-4 provides the following illustrative example,

 

Facts. Applicable large employer member Z and applicable large employer member Y are the two members of an applicable large employer. Applicable large employer member Z employs 40 full-time employees in each calendar month of 2017. Applicable large employer member Y employs 35 full-time employees in each calendar month of 2017. Assume that for 2017, the applicable payment amount for a calendar month is $2,000 divided by 12. Applicable large employer member Z does not sponsor an eligible employer-sponsored plan for any calendar month of 2017, and receives a Section 1411 Certification for 2017 with respect to at least one of its full-time employees. Applicable large employer member Y sponsors an eligible employer-sponsored plan under which all of its full-time employees are eligible for minimum essential coverage.

 

Conclusion. Pursuant to section 4980H(a) and this section, applicable large employer member Z is subject to an assessable payment under section 4980H(a) for 2017 of $48,000, which is equal to 24 × $2,000 (40 full-time employees reduced by 16 (its allocable share of the 30-employee offset ((40/75) × 30 = 16)) and then multiplied by $2,000). Applicable large employer member Y is not subject to an assessable payment under section 4980H(a) for 2017.

[1] There have been numerous attempts to repeal or revise the ACA, as of the date these materials went to the publisher, the ACA was still in effect.

[2] 26 USC §4980H(c)(2)(A)

[3] Id.

[4] Id.

[5] 26 USC § 4980H(c)(2)(D).

[6] 26 U.S.C. § 4980H(c)(2)(E).

[7] 2000/120.44 = 16.60 rounded to the nearest whole employee 17.

[8] 26 USC § 4980H(a).

[9] 26 USC § 5000A

[10] Id.

[11] See Internal Revenue Service, Minimum Value and Affordability, https://www.irs.gov/affordable-care-act/employers/minimum-value-and-affordability

[12] Internal Revenue Service, Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, https://www.irs.gov/affordable-care-act/employers/questions-and-answers-on-employer-shared-responsibility-provisions-under-the-affordable-care-act

[13] Id.

[14] Id.

[15] Whitehouse.gov, Executive Order Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal, https://www.whitehouse.gov/the-press-office/2017/01/2/executive-order-minimizing-economic-burden-patient-protection-and

[16] 29 USC § 4980H.

[17]

[18] 26 USC § 4980H, “imposed on the employer an assessable payment equal to the product of the applicable payment amount and the number of individuals employed by the employer as full-time employees during such month.”

[19] 26 CFR 54.4980H-4 (emphasis added)

The Employee Retirement Income Security Act of 1974 (“ERISA”)

Overview

ERISA is a comprehensive federal law regulating employer provided pensions and benefit plans. It is codified at 29 U.S.C. 18 §1001 et seq. ERISA was adopted to provide a consistent framework for benefit plans; prior to its enactment, various state and federal laws created a disjointed regulatory framework. Once employee benefit plans are offered, ERISA governs and preempts any state law which is contrary to its provisions. The purpose is to protect promised employee benefits offered by private employers. Note that ERISA does not require employers to provide or offer benefit plans.[1] Rather:

ERISA requires plans to provide participants with plan information including important information about plan features and funding; sets minimum standards for participation, vesting, benefit accrual and funding; provides fiduciary responsibilities for those who manage and control plan assets; requires plans to establish a grievance and appeals process for participants to get benefits from their plans; gives participants the right to sue for benefits and breaches of fiduciary duty; and, if a defined benefit plan is terminated, guarantees payment of certain benefits through a federally chartered corporation, known as the Pension Benefit Guaranty Corporation (PBGC).[2]

Additionally, note that ERISA does not apply to retirement plans established or maintained by government entities, churches, or other plans intended comply only with workers compensation, unemployment, or disability laws and regulations.[3]

ERISA contains three main sections Subchapter I – Protection of Employee Benefit Rights, Subchapter II – Jurisdiction, Administration, Enforcement; Joint Pension Task Force, Etc. and Subchapter III – Plan Termination Insurance.

The purpose of ERISA is to:

protect interstate commerce and the interests of participants in employee benefit plans and their beneficiaries, by requiring the disclosure and reporting to participants and beneficiaries of financial and other information with respect thereto, by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the Federal courts.

[and] to protect interstate commerce, the Federal taxing power, and the interests of participants in private pension plans and their beneficiaries by improving the equitable character and the soundness of such plans by requiring them to vest the accrued benefits of employees with significant periods of service, to meet minimum standards of funding, and by requiring plan termination insurance.[4]

The central provisions of ERISA:

  1. Establish requirements that must be met to adopt or amend benefit plans;
  2. Place limits on exclusions;
  3. Enable DOL to regulate benefit plans;
  4. Set minimum standards for vesting;
  5. Set minimum standards for funding;
  6. Create fiduciary duties owed by administrators to participants
  7. Create reporting requirements;
  8. Guarantee payment of certain benefits; and
  9. Create claims procedures for review of adverse determinations.

Applicability

ERISA only applies to certain plans. Specifically, ERISA applies to benefit plans, funds or programs established by private employers and private employee organizations.[5] Under ERISA an “employee welfare benefit plan” or “welfare plan” is defined as:

any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section 186(c) of this title (other than pensions on retirement or death, and insurance to provide such pensions).[6]

According to this definition a welfare plan requires (1) a plan, fund, or program (2) established or maintained (3) by an employer or by an employee organization, or by both, (4) for the purpose of providing medical, surgical, hospital care, sickness, accident, disability, death, unemployment or vacation benefits, apprenticeship or other training programs, day care centers, scholarship funds, prepaid legal services or severance benefits (5) to participants or their beneficiaries.[7] Further, the Court in Dillingham noted:

Not so well defined are the first two prerequisites: “plan, fund, or program” and “established or maintained.” Commentators and courts define “plan, fund, or program” by synonym-arrangement, scheme, unitary scheme, program of action, method of putting into effect an intention or proposal, design-but do not specify the prerequisites of a “plan, fund, or program.” At a minimum, however, a “plan, fund, or program” under ERISA implies the existence of intended benefits, intended beneficiaries, a source of financing, and a procedure to apply for and collect benefits.

“Established or maintained” appears twice in the definition of an employee welfare benefit plan: first, an employer or employee organization or both must establish or maintain a plan, fund, or program, and, second, the plan, fund, or program must be established or maintained for specified purposes. In many instances a plan is established or maintained, or both, in writing. It is obvious that a system of providing benefits pursuant to a written instrument that satisfies ERISA ss 102 and 402, 29 U.S.C. §§ 1022 and 1102, would constitute a “plan, fund or program.”

ERISA does not, however, require a formal, written plan. ERISA’s coverage provision reaches “any employee benefit plan if it is established or maintained” by an employer or an employee organization, or both, who are engaged in any activities or industry affecting commerce. ERISA s 4(a), 29 U.S.C. s 1003(a) (emphasis added). There is no requirement of a formal, written plan in either ERISA’s coverage section, ERISA s 4(a), 29 U.S.C. s 1003(a), or its definitions section, ERISA s 3(1), 29 U.S.C. s 1002(1). Once it is determined that ERISA covers a plan, the Act’s fiduciary and reporting provisions do require the plan to be established pursuant to a written instrument, ERISA §§ 102 and 402, 29 U.S.C. §§ 1022 and 1102; but clearly these are only the responsibilities of administrators and fiduciaries of plans covered by ERISA and are not prerequisites to coverage under the Act. Furthermore, because the policy of ERISA is to safeguard the well-being and security of working men and women and to apprise them of their rights and obligations under any employee benefit plan, See ERISA § 2, 29 U.S.C. s 1001, it would be incongruous for persons establishing or maintaining informal or unwritten employee benefit plans, or assuming the responsibility of safeguarding plan assets, to circumvent the Act merely because an administrator or other fiduciary failed to satisfy reporting or fiduciary standards. Accord, Dependahl v. Falstaff Brewing Corp., 491 F.Supp. 1188, 1195 (E.D. Mo. 1980), aff’d 653 F.2d 1208 (8th Cir. 1981).[8]

After so noting, the Court in Dillingham established the following test to determine if a “plan, fund, or program” falls is a plan for the purpose of ERISA:

At a minimum, however, a “plan, fund, or program” under ERISA implies the existence of intended benefits, intended beneficiaries, a source of financing, and a procedure to apply for and collect benefits.

To be an employee welfare benefit plan, the intended benefits must be health, accident, death, disability, unemployment or vacation benefits, apprenticeship or other training programs, day care centers, scholarship funds, prepaid legal services or severance benefits; the intended beneficiaries must include union members, employees, former employees or their beneficiaries; and an employer or employee organization, or both, and not individual employees or entrepreneurial businesses, must establish or maintain the plan, fund, or program.[9]

In other words, there are four elements to establish a plan, (1) intended benefits; (2) intended beneficiaries; (3) a source of financing and (4) a procedure to apply for and collect benefits.  The United States Supreme Court added a fifth element in Fort Halifax Packing Co, Inc. v Coyne:

The courts’ conclusion that they should be so regarded took into account ERISA’s central focus on administrative integrity: if an employer has an administrative scheme for paying benefits, it should not be able to evade the requirements of the statute merely by paying those benefits out of general assets. Some severance benefit obligations by their nature necessitate an ongoing administrative scheme, but others do not.[10]

In other words, a single payment as part of a severance plan is not part of an “ongoing administrative scheme” and does not fall under ERISA.

Notably, ERISA contains numerous exclusions, including an exclusion for employee benefit plans that are (1) a governmental plan, (2) a church plan, (3) a plain maintained solely for the purpose of complying with applicable workmen’s compensation laws or unemployment compensation or disability insurance laws, (4) such plan is maintained outside of the United States primarily for the benefit of persons substantially all of whom are nonresident aliens; or (5) such plan is an excess benefit plan.[11]

Types of Plans

ERISA contemplates two distinct types of plans, employee pension benefit plans and employee welfare benefit plans.

Employee Welfare Plans include plans that provide:

  1. medical, surgical, or hospital care or benefits,
  2. benefits in the event of sickness,
  3. accident, disability, death or unemployment, or vacation benefits,
  4. apprenticeship or other training programs,
  5. day care centers,
  6. scholarship funds,
  7. prepaid legal services, or
  8. pooled holiday, severance, or similar benefits under Section 302(c) of the Labor Management Relations Act of 1947.[12]

Employee Pension Benefit Plans include:

any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program:

(i) provides retirement income to employees, or

(ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond,

 

regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan. A distribution from a plan, fund, or program shall not be treated as made in a form other than retirement income or as a distribution prior to termination of covered employment solely because such distribution is made to an employee who has attained age 62 and who is not separated from employment at the time of such distribution.[13]

Fiduciary Duties

ERISA creates specific fiduciary duties for administrators of employee benefit plans. Plan fiduciaries have a duty to act as in prudence. Fiduciaries are those who exercise any discretionary authority or control over the plan or assets, and render investment advice or have discretionary authority in administrating the plan.[14] Specifically, ERISA creates a “Prudent Man Standard of Care” which requires the following:

  1. Acting for the exclusive purpose of:
    1. Providing benefits to participants and their beneficiaries; and
    2. Defraying reasonable expenses of administering the plan;
  2. Act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use; and
  3. Diversify the investments of the plan to minimize the risk of large losses.[15]

Additionally, a fiduciary may not maintain the indicia of ownership of any assets of a plan outside the jurisdiction of the district courts of the United States.[16] Note that there are exceptions to the fiduciary duty when the plan beneficiaries or participants participate in the management of the plan.[17]

Fiduciaries are also prohibited from engaging in the following transactions under ERISA if the fiduciary knows or should know that such a transaction constitutes a direct or indirect:

(A) sale or exchange, or leasing, of any property between the plan and a party in interest;

(B) lending of money or other extension of credit between the plan and a party in interest;

(C) furnishing of goods, services, or facilities between the plan and a party in interest;

(D) transfer to, or use by or for the benefit of a party in interest, of any assets of the plan; or

(E) acquisition, on behalf of the plan, of any employer security or employer real property in violation of certain percentage limitations under ERISA.[18]

ERISA also prohibits transactions between plan and fiduciary.

A fiduciary with respect to a plan shall not–

(1) deal with the assets of the plan in his own interest or for his own account,

(2) in his individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries, or

(3) receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.[19]

Vesting/Nonforfeitability Requirements

ERISA also creates minimum vesting and nonforfeitability requirements under § 1053. First it requires that pension plans “provide that an employee’s right to his normal retirement benefit is nonforfeitable upon the attainment of normal retirement age….”[20] This can be satisfied if an employee’s rights in his accrued benefit derived from his own contributions are nonforfeitable.[21]For defined benefit plans, the plan must either provide that “an employee who has completed at least 5 years of service has a nonforfeitable right to 100 percent of the employee’s accrued benefit derived from employer contributions” or allow for nonforfeitable percentages of accrued benefits as follows[22]:

 

Years of Service:       Nonforfeitable Percentage

3………………………………………………………….. 20

4………………………………………………………….. 40

5………………………………………………………….. 60

6………………………………………………………….. 80

7………………………………………………………… 100

Minimum Funding Standards

ERISA requires plans to meet a minimum funding standard each year. ERISA provides requirements which must be met for different types of plans in order to meet this minimum standard. First for defined benefit plans (single-employer) the employer must make contributions not less than the sum of:

(A) the target normal cost of the plan for the plan year,

(B) the shortfall amortization charge (if any) for the plan for the plan year determined under subsection (c) of this section, and

(C) the waiver amortization charge (if any) for the plan for the plan year as determined under subsection (e) of this section; or

(2) in any case in which the value of plan assets of the plan (as reduced under subsection (f)(4)(B) of this section) equals or exceeds the funding target of the plan for the plan year, the target normal cost of the plan for the plan year reduced (but not below zero) by such excess.[23]

Next, in the case of a money purchase plan which is a single-employer plan, the employer makes contributions to or under the plan for the plan year which are required under the terms of the plan.[24] For  a multiemployer plan, the employers make contributions to or under the plan for any plan year which, in the aggregate, are sufficient to ensure that the plan does not have an accumulated funding deficiency.[25] For CSEC plan, the employers make contributions to or under the plan for any plan year which, in the aggregate, are sufficient to ensure that the plan does not have an accumulated funding deficiency.[26] Note that ERISA allows for variances or waivers under certain circumstances.[27] Additionally, note that ERISA allows certain plans to include amortization and provisions on how to treat underfunded plans.[28]

Reporting and Disclosure Requirements.

ERISA requires the disclosure of various information and disclosure requirements. The Department of labor has a comprehensive reporting and disclosure guide for employee benefit plans.[29] Generally, ERISA requires annual reports to be filed with the Secretary of Labor[30], certain Terminal and Supplementary reports,[31] notice to beneficiaries of failure to meet minimum funding standards,[32] notice to participants of transfers of excess pension assets to health benefit accounts,[33] and defined benefit plan funding notices.[34] Other information must also be made available upon request.[35]

Enforcement

In order to give some teeth to requirements, ERISA provides for certain enforcement mechanism and penalties. Generally, the Department of Labor (“DOL”) and the Employee Benefits Security Administration (“EBSA”), and the PBGC enforce employee benefit issues. The IRS may also become involved. Note that ERISA allows for both criminal and civil penalties.[36] ERISA also creates a private right of action whereby participants or beneficiaries may bring legal action to enforce ERISA and obtain relief or clarify future benefits. If an administrator refuses to supply requested information, a court may access a penalty of up to $100 a day.[37]  If the administrator fails to file an annual report, the Secretary of Labor may assess a civil penalty of up to $1,000 a day.[38] Further, Employers that fail to make certain notices may be liable of up to $100 per day. For certain violations of ERISA, the Secretary may assess a fine of up to $1,000 per day.[39] Additionally ERISA provides for enforcement for the improper use of genetic information.[40]

Preemption

ERISA specifically preempts state statutes and laws relating to employee benefit plans.[41]

[1] United States Department of Labor, ERISA, https://www.dol.gov/general/topic/retirement/erisa

[2] Id.

[3] Id.

[4] 29 USC § 1001(b)-(c)

[5] 29 USC § 1003(a)

[6] 29 USC § 1002(1)

[7] See Donovan v. Dillingham, 688 F.2d 1367, 1371 (11th Cir. 1982).

[8] Id.

[9] Id. at 1371-73 (emphasis added).

[10] Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 18, 107 S. Ct. 2211, 2221, 96 L. Ed. 2d 1 (1987)

[11] 29 USC § 1003(b)

[12] 29 USC § 1002(1)l 29 USC § 186(c)

[13] 29 USC § 1002(A)

[14] 29 USC 1002((21)(A)

[15] 29 USC § 1104(a)

[16] 29 USC § 1104(b)

[17] 29 USC § 1104(c)

[18] 29 USC § 1106(a)

[19] 29 USC § 1106(b)

[20] 29 USC § 1053(a)

[21] Id.

[22] Id.

[23] 29 USC §1082(a)(2)(A) and 29 USC § 1083(a)

[24] 29 USC §1082(a)(2)(B)

[25] 29 USC §1082(a)(2)(C)

[26] 29 USC §1082(a)(2)(D)

[27] 29 USC §1082(c)

[28] 29 USC §§ 1083-84

[29] Department of Labor, Reporting and Disclosure Guide for Employee Benefit Plans, available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/rdguide.pdf

[30] 29 USC § 1023.

[31] 29 USC § 1021.

[32] 29 USC § 1021(d).

[33] 29 USC § 1021(e).

[34] 29 USC § 1021(f).

[35] 29 USC § 1021(g).

[36] 29 USC §§ 1131-33

[37] 29 USC § 1132(c)(1)

[38] 29 USC § 1132(c)(2)

[39] 29 USC § 1132(c)(3), fines may be assessed for violations of  subsection (j), (k), or (l) of section 1021 of Title 29 , section 1021(g), or section 1144(e)(3).

[40] 29 USC § 1132(c)(10).

[41] 29 USC § 1144.