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.

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