General Practice, Solo & Small Firm DivisionMagazine
by David M. Ermer
© American Bar Association. All rights reserved.
David M. Ermer is a partner at Gordon & Barnett in Washington, D.C. His practice focuses on the fields of employee benefits and government contracts. He thanks his colleague Mary M. Sifferman for her assistance in the preparation of this article.
The Employee Retirement Income Security Act of 19741 (ERISA) is an expansive federal law governing the design and administration of employee benefit plans. Practitioners specializing in this field agree that we often see our colleagues' eyes glaze over when they hear the word ERISA. Yet when the inevitable ERISA questions arise, this roadmap may be helpful.
Due to ERISA's expansiveness, the statute has a significant impact on the general practitioner that cannot be ignored. For example, if you are advising a business that offers employee benefits, such as medical benefits, those benefits likely are subject to ERISA. If you represent an individual who has been terminated from employment, you may pursue on her behalf rights to severance pay or continuation of medical benefits that will be governed by ERISA.
ERISA will also affect a domestic relations practice. A separation or divorce order is likely to address division of retirement benefits or provision of medical benefits for the children. Such orders will be affected by ERISA's qualified domestic relations order and qualified medical child support order requirements.2
ERISA § 3 broadly defines the term "employee benefit plan" to include any pension benefit plan or any welfare benefit plan. A pension benefit plan is "any plan, fund, or program" that provides retirement or deferred income to employees. A welfare benefit plan is "any plan, fund, or program" that provides, through the purchase of insurance or otherwise: (1) severance pay; (2) medical benefits; (3) benefits in the event of sickness, accident, disability, death or unemployment; (4) vacation benefits; (5) apprenticeship or training programs; (6) day care centers; (7) scholarship funds; (8) prepaid legal services; or (9) any benefit described in the Taft Hartley Act § 302(c) (other than pension benefits).3
ERISA is applicable to any "employee benefit plan" established or maintained by an employer engaged in interstate commerce and/or an employee organization representing employees of such employers.4 Employee organizations include both labor unions and employees beneficiary associations. The principal exceptions to ERISA's coverage are: (1) governmental plans,5 (2) church plans,6 and (3) plans maintained solely for the purpose of complying with workers' compensation, unemployment compensation, or disability laws.7 Department of Labor (DOL) regulations8 also carve out exceptions for benefit programs that an employer offers without endorsement or administrative support, such as payroll deduction, and for certain payroll practices.
ERISA's Four Titles
ERISA has four titles. Title I-"Protection of Employee Benefit Rights"-is the focus of this article. Title I establishes reporting, disclosure, and fiduciary responsibility standards for all ERISA-governed plans. It creates standards for plan participation, benefit vesting, benefit accrual, and benefit funding for pension plans; and sets forth administration and enforcement provisions concerning those standards. It also establishes plan design rules for group health plans.
Title II, which applies only to tax-qualified retirement plans, contains amendments to the Internal Revenue Code (IRC), many of which parallel the provisions of Title I. Title III includes various jurisdictional and administrative provisions, and Title IV creates an insurance program administered by the Pension Benefit Guaranty Corporation for defined benefit retirement plans that terminate without sufficient assets to cover vested benefits.
The Player Line-Up
ERISA defines five key functions: plan sponsor, plan participant, plan administrator, plan trustee, and plan fiduciary.
- The sponsor is the employer or employee organization that establishes the plan. In the case of a plan maintained by two or more employers or by an employer and an employee organization, the sponsor is the joint board or trustees or other similar group of representatives who establishes or maintains the plan.9
- A plan participant is an employee or employee organization member who is or may become eligible for employee benefit plan coverage. (A covered dependent is considered a "beneficiary.")10
- The plan administrator is responsible for compliance with ERISA's reporting and disclosure obligations. The plan sponsor is the plan administrator unless a different party is named in the plan document. It is better practice to avoid naming an individual person as plan administrator because the administrator is liable for ERISA reporting and disclosure noncompliance penalties.11
- If the plan is separately funded, its assets must be held in a trust fund administered by a trustee.12 Pension plans generally are funded, and welfare plans may be self-funded out of an employer's assets or funded through a tax-exempt entity known as a voluntary employees beneficiary association (VEBA) pursuant to I.R.C. § 501(c)(9).
- A plan fiduciary is a person with discretionary authority over either plan administration or plan assets.13 In a funded plan, the party with discretionary authority over plan investments is a fiduciary. In either type of plan, the party with discretionary authority over claims payment decisions is a fiduciary. The courts have recognized, however, that plan design decisions, even if made by a named plan fiduciary, are plan sponsor actions that are not subject to ERISA's fiduciary responsibility rules discussed below.14
ERISA prohibits persons who have been convicted of certain crimes from serving as an administrator; fiduciary; officer; trustee; custodian; counsel; agent; or employee of, or consultant to, an employee benefit plan during a court-established period of three to 13 years after such conviction or release from imprisonment, whichever is later.15
Establishing a Plan
ERISA requires that plans be established pursuant to, and administered in accordance with, written plan documents. It is important to know that an ERISA-governed plan may exist even if ERISA's requirements for establishing a plan (i.e., creating a written plan document) have not been satisfied. A frequent example occurs when an employer has a "practice" of giving severance pay to employees who are laid off or terminated. Under differing circumstances, such practices can be a pension plan, a welfare plan, or a payroll practice that is not governed by ERISA. The Supreme Court has held that a plan exists if ongoing administration is necessary.16
Lawyers counseling a business should consider the advantages of structuring an employee benefit as an ERISA-governed plan in these ambiguous circumstances. Compliance with ERISA's requirements protects your client by limiting its liability to the benefits provided in the written documents and avoiding state mandates, as discussed below. Finally, ERISA's disputed claims procedures will limit the scope of court review of the plan's decision to deny benefits.
The Plan Document
Whether you are counseling a business offering employee benefit plans or an individual with an employee benefits issue, an important initial step for you is to request the plan documents from the plan administrator. What should you find? If a plan is in compliance with ERISA, you will find, at a minimum, a "plan document" that basically serves as the plan's constitution, and a summary plan description (SPD). According to ERISA,17 the plan document must:
- Name one or more fiduciaries who have authority to control and manage the operation and administration of the plan.
- Provide a procedure for establishing and carrying out a funding policy consistent with the objectives of the plan.
- Create a procedure for amending the plan.
- Specify the basis on which payments are made to and from the plan.
This document also may authorize the plan's named fiduciaries to: (1) appoint an investment manager to manage the assets of the plan; and (2) employ advisors, such as actuaries, accountants, and lawyers.
Pension plans. The plan document for a pension plan also will include a detailed description of the plan's benefit structure, which must comply with the plan design requirements of ERISA, the IRC, and related federal laws such as the Uniform Services Employment and Reemployment Rights Act of 1994.18 Those benefit provisions are then summarized in an SPD for the participants. The courts generally have ruled that participants may rely on the SPD in the event of a conflict between the SPD and the plan document.19
Welfare plan. A welfare plan's benefits usually are stated exclusively in the SPD. ERISA originally provided few design requirements for welfare plans. However, during the past decade, Congress has enacted numerous design requirements for group health plans, including the temporary continuation of coverage requirements of COBRA, the limitations on preexisting conditions of the Health Insurance Portability and Accountability Act of 1996, minimum standards for child immunization coverage and maternity coverage, and mental health benefits parity mandates.20
The plan document also must include a claims procedure, under which:
- The plan must supply any participant or beneficiary whose claim has been denied with a written notice that clearly sets forth the specific reasons for the denial.
- The participant or beneficiary is given a reasonable opportunity for a full and fair review by an appropriate plan fiduciary.21
Awareness of this claims procedure is important. First, except under certain limited circumstances, the plan's appeal procedure must be pursued before a claimant can institute a court action. A claimant's failure to follow this procedure can result in delay or loss of legal remedy.22 If the claims procedure grants discretion to the decision-making fiduciary, then the court generally will review that decision under an abuse of discretion standard.23
ERISA requires that plan fiduciaries comply with the plan documents.24 Although this rule seems obvious and might be expected to cause little concern, it can be troublesome. This is primarily because the governing documents of some plans may be relatively old and not flexible enough to accommodate changing circumstances. Of particular concern are provisions that narrowly restrict the authority of the plan's fiduciaries. Accordingly, plan documents periodically should be reviewed and amended when necessary.
Reporting and Disclosure Obligations
ERISA also requires that every plan fiduciary and every person who handles plan funds or other property be bonded. The amount of the bond must be not less than 10 percent of the value of assets handled, but not less than $1,000 or more than $500,000.25
Subject to certain exceptions set forth in DOL regulations,26 the plan administrator must arrange for an independent public accountant's audit of the plan and must file an annual financial report known as Form 5500 with the IRS.27 Unless an extension has been granted, the plan's Form 5500 is due seven months after the end of the plan year. Failure to file Form 5500 in a timely manner can result in the imposition of a $1,100 per day penalty on the plan administrator.28
A plan administrator also must furnish participants and beneficiaries with a summary plan description, a notice of material modifications to the plan, and a summary of the Form 5500 (the "summary annual report").29 In addition, more detailed information, such as a vested benefits statement, must be made available to participants and beneficiaries on request. A court may impose on a plan administrator a $100 per day penalty-payable to the requesting participant-for failing to send the information within 30 days after the request.30
These documents provide you with an invaluable resource. For example, if you are representing an individual in a divorce proceeding, you will be able to get access to information about the spouse's benefits by pursuing a qualified domestic relations order (QDRO). This information should be easily ascertainable through the spouses' rights under ERISA, in stark contrast to pursuing legal discovery procedures in the divorce action.31 Similarly, you will be able to receive the soon-to-be-ex-spouse's medical plan information, so that you can determine whether a qualified medical child support order (QMCSO) should be part of the divorce settlement. If you are representing a terminated employee in an age discrimination case, you will be able to use the client's ERISA rights to information to determine whether the client has other remedies available, such as severance rights or an ERISA § 510 action for interference with protected rights.
ERISA § 404 imposes certain fiduciary responsibilities on plan fiduciaries that are grounded in basic principles of trust law. In addition, the prohibited transaction rules of ERISA § 406 expand those fiduciary responsibilities well beyond basic trust principles. Anyone who assumes discretionary authority with respect to plan administration or plan assets is a plan fiduciary, which means that a lawyer or another advisor can assume this status unwittingly.
ERISA requires that a fiduciary act "solely in the interest of the plan's participants and beneficiaries," for the "exclusive purpose" of providing plan benefits and defraying reasonable administrative expenses, and with the care, skill, prudence, and diligence of a similarly situated prudent person.32 ERISA also requires fiduciaries to diversify plan investments and, as mentioned above, to comply with plan documents to the extent that they are ERISA compliant.33
A fiduciary who commits a breach of any fiduciary duty can be held personally liable for any loss to the plan that results from such breach, plus a civil penalty of 20 percent of such loss.34 The Supreme Court has ruled that courts may award damages to participants in fiduciary breach actions under certain circumstances.35 The defalcating fiduciary also may be removed from her position as a fiduciary.
Most practitioners will want to avoid ERISA fiduciary status. A lawyer whose client is the company will have the client's interest to protect. If you become a fiduciary of the plan, you may find yourself in a conflict of interest. In addition, as a fiduciary, you will be personally liable for any breach of fiduciary duty that you commit, as well as losses caused by breaches of another fiduciary. Such liability is not covered by most malpractice policies. You can avoid fiduciary status simply by limiting your role to that of an advisor.
In addition, ERISA prohibits virtually all plan transactions involving or benefiting a party in interest, unless exempted. ERISA lists these prohibited transactions.36 The term party in interest broadly includes, among others: fiduciaries; contributing employers; sponsoring unions; persons who provide services with respect to an employee benefit plan; and a wide range of persons associated with such entities, such as owners, directors, officers, and certain employees of subsidiaries.37
ERISA § 408 creates several statutory exemptions and authorizes the DOL to grant administrative exemptions from the prohibited transaction rules. Among the transactions specifically exempted by ERISA are the making of a loan by a plan to participants and beneficiaries, the provision of office space or necessary services to a plan by a party in interest, certain transactions with banks and insurance companies that are parties in interest, the payment of normal benefits and proper expenses to fiduciaries, and the payment of reasonable compensation to certain fiduciaries.38 Administrative exemptions cover a wide range of individual transactions and certain classes of transactions.
ERISA's statutory exemptions often condition the exemption on meeting certain prerequisites, and implementing DOL regulations may restrict their coverage. It also is common for administrative exemptions, which may be granted on a class-wide basis, to include detailed conditions. The prohibited transaction provisions often necessitate the assistance of legal counsel familiar with ERISA.
A fiduciary who causes a plan to engage in a prohibited transaction commits a breach of fiduciary duty. Moreover, a party in interest who is involved in a prohibited transaction with a welfare plan may be subject to a civil penalty imposed by the DOL. This penalty may be as great as 100 percent of the plan assets involved in the transaction.39
For these reasons, familiarity with ERISA's fiduciary responsibilities is critical. You will need to monitor your activities to make sure that you do not inadvertently assume fiduciary liability. In addition, you will need to monitor your clients' activities to make sure that they do not breach fiduciary obligations or commit a prohibited transaction.
Controlling Fiduciary Liability
A person generally is a fiduciary only with respect to those plan assets and decisions over which he has authority, control, or influence. Therefore, for example, his fiduciary duties generally extend only to the handling of those assets.
To the extent that a person holds fiduciary responsibility, she must engage in careful, well-advised decision-making processes. Fiduciaries should be particularly careful in situations where they have, may have, or may be perceived as having dual loyalties. Whenever possible, a fiduciary who finds herself in such a position should step aside and let other, disinterested fiduciaries take the action in question.
If it is not possible to step aside, the fiduciary should take extraordinary steps to assure that his decision is made to promote only the interests of the plan's participants and beneficiaries. Such steps generally would include the retention of legal counsel and other appropriate advisors who have no interest in or loyalty to the party to whom the fiduciary has a dual loyalty.40 It also is very important to keep a careful record of the decision-making process so that the fiduciary will be protected if questions are raised in the future.
ERISA authorizes fiduciaries to delegate their responsibilities to co-fiduciaries and to appoint investment managers as defined by ERISA. These delegations must be made in writing and signed by the fiduciary or investment manager receiving the delegation. Nevertheless, a fiduciary may be liable for losses caused by breaches of another fiduciary if: (1) the fiduciary participates in the other fiduciary's breach knowing it to be a breach; (2) the fiduciary fails to comply with her fiduciary duties (for example, the duty of diligence), thus enabling the other fiduciary to commit the breach in question; or (3) the fiduciary knows of a breach committed by another fiduciary and fails to make reasonable efforts to remedy that breach.41
ERISA allows a plan to purchase insurance to cover the plan for any losses caused by breaches of its fiduciaries, as long as the policy allows the insurance company to collect the amount of such covered loss from the liable fiduciary. It also allows fiduciaries or the entities that appoint them to obtain their own insurance to cover such liability.42 This additional insurance is often in the form of an elimination of recourse (or "non-recourse") rider to a policy.
Administration and Enforcement
The reporting and disclosure and fiduciary responsibility provisions of Title I of ERISA and the prohibited transactions provisions of the IRC are administered, for the most part, by the DOL. The IRS administers ERISA's minimum participation, vesting, and funding requirements, which apply only to pension plans.
ERISA provides that civil suits to enforce the provisions of Title I may be brought by participants, beneficiaries, fiduciaries, and/or the DOL. The district courts have exclusive jurisdiction over most civil suits under Title I. ERISA provides these courts with the authority to grant specific forms of relief in such a suit, and the courts have not authorized any extra-statutory relief.43 State courts have concurrent jurisdiction over certain civil suits brought by participants or beneficiaries to recover benefits or enforce rights under a plan. ERISA provides for an award of attorney fees and costs to either party in a civil action under Title I.44
ERISA authorizes the DOL to investigate whether a violation of Title I has occurred. The DOL may require the submission of reports, books, and records in support of any information required to be reported to the Department. It also may inspect any books or records, or question any person, in relation to such an investigation.45 Additionally, ERISA also protects participants and beneficiaries from interference with their rights under Title I and related laws.46
ERISA Preemption of State Law
To allow for uniform plan administration, ERISA47 broadly preempts state laws, but not federal laws, that "relate to" ERISA-governed plans.48 The Supreme Court historically has defined the "relate to" clause broadly. For example, the Supreme Court has held that ERISA preempts mandated benefit laws and bad-faith tort laws.49 However, ERISA preemption is subject to certain exceptions.
The primary exceptions are for state criminal laws of general application and for state insurance, banking, and securities (or "blue sky") laws-provided, however, that a plan may not be deemed to be an insurance company, a bank, or a securities dealer for state law purposes. The interplay between the exception and the deemer clause creates an important distinction between insured and self-insured plans. For example, courts have determined that state-mandated benefit laws are insurance laws because they bear on the risk assumed by the insurer. Thus, such laws could be applied to an insured ERISA-governed health plan but could not be applied to a self-insured ERISA-governed health plan.50
In a string of decisions issued since 1995, the Supreme Court has discouraged the lower courts from further broadening the scope of ERISA preemption.51 Moreover, the ability of managed care organizations to use ERISA preemption to cloak themselves against malpractice liability in certain cases has attracted congressional attention, and may lead to a statutory reduction in the scope of ERISA preemption. In any event, ERISA preemption does not apply to federal law. In recent years, Congress has passed several laws, such as the Americans with Disabilities Act,52 that significantly impact the design and administration of employee benefit plans.
For detailed information on ERISA, you can consult the Employee Benefits Law treatise published by the ABA's Section of Labor and Employment Law (BNA Books, 800/960-1220). CL
- 29 U.S.C. § 1001 (1994).
- See article on QMCSOs in the March 1998 issue of the ABA Journal, p. 81.
- ERISA §§ 3(1), 3(2); 29 U.S.C. §§ 1002(1), 1002(2) (1994).
- ERISA § 4, 29 U.S.C. § 1103 (1994); see also ERISA §§ 3(4), 3(5), 3(6), 3(11), and 3(12); 29 U.S.C. §§ 1002(4), 1002(5), and 1002(6), 1002 (11), and 1002(12) (1994).
- As defined in ERISA § 3(32).
- As defined in ERISA § 3(33).
- ERISA § 4(b); 29 U.S.C. § 1003(b) (1994).
- 29 C.F.R. §§ 2510.3-1 to 2510.3-3 (1997).
- ERISA § 3(16)(B); 29 U.S.C. § 1002(16)(B) (1994).
- ERISA §§ 3(7) and 3(8); 29 U.S.C. §§ 1002(7) and 1002(8) (1994).
- ERISA § 3(16)(A); 29 U.S.C. § 1002(16)(A) (1994).
- ERISA § 403; 29 U.S.C. § 1103 (1994).
- ERISA § 3(21); 29 U.S.C. § 1002(21) (1994).
- Hozier v. Midwest Fasteners, Inc., 908 F.2d 1155, 1161-62 (3d Cir. 1990).
- ERISA § 411; 29 U.S.C. § 1111 (1994).
- Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987).
- ERISA § 402; 29 U.S.C. § 1102 (1994).
- 38 U.S.C. § 4301 (1994).
- Mers v. Marriott International Group Accidental Death and Dismemberment Plan, 137 F.3d 510 (7th Cir. 1998); Heidgerd v. Olin Corp., 906 F.2d 903 (2d Cir. 1990).
- 29 U.S.C. §§ 1161-1191c (1994 and Supp. II).
- ERISA § 503; 29 U.S.C. § 1133 (1994); 29 C.F.R. § 2560.503-1 (1997).
- Diaz v. United Agricultural Employee Welfare Benefit Plan, 50 F.3d 1478 (9th Cir. 1995).
- Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989); Kearney v. Standard Insurance Co. __ F.3d __, 1998 WL 188075 (9th Cir. April 21, 1998).
- ERISA § 404; 29 U.S.C. § 1104 (1994).
- ERISA § 412; 29 U.S.C. § 1112 (1994).
- 29 C.F.R. §§ 2520.104-1 to 2520.104-47 (1997).
- ERISA § 101(b); 29 U.S.C. § 1021(b) (1994).
- ERISA § 502(c)(2); 29 U.S.C. § 1132(c)(2); 29 C.F.R. § 2570.502c-2 (1997).
- ERISA § 101(a); 29 U.S.C. § 1021(a) (1994).
- ERISA § 502(c); 29 U.S.C. § 1132(c) (1994).
- ERISA §§ 104(b)(2) and 104(b)(4); 29 U.S.C. §§ 1024(b)(2) and 1024(b)(4) (1994).
- ERISA § 404; 29 U.S.C. § 1104 (1994).
- ERISA §§ 409(a) and 502(l); 29 U.S.C. §§ 1109(a) and 1132(l) (1994).
- Varity Corp. v. Howe, 516 U.S. 489 (1996).
- ERISA § 406; 29 U.S.C. § 1106 (1994).
- ERISA § 3(14); 29 U.S.C. § 1002(14) (1994).
- ERISA §§ 408(b), 408(c), 408(d), and 408(e); 29 U.S.C. §§ 1108(b), 1108(c), 1108(d), and 1108(e) (1994).
- ERISA § 502(i); 29 U.S.C. § 1132(i) (1994).
- Donovan v. Bierwirth, 680 F.2d 263, 271-73 (2d Cir.), cert. denied, 459 U.S. 1069 (1982).
- ERISA § 405(a); 29 U.S.C. § 1105(a) (1994).
- ERISA § 410; 29 U.S.C. § 1110 (1994).
- McLeod v. Oregon Lithoprint, Inc., 102 F.3d 376 (9th Cir. 1996), cert. denied, 117 S. Ct. 1823 (1997).
- ERISA § 502; 29 U.S.C. § 1132 (1994).
- See ERISA § 504; 29 U.S.C. § 1134 (1994).
- ERISA §§ 510 and 511; 29 U.S.C. §§ 1140 and 1141 (1994).
- ERISA § 514; 29 U.S.C. § 1144 (1994).
- Shaw v. Delta Air Lines, 463 U.S. 85 (1983).
- Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41 (1987); Metropolitan Life Insurance Co. v. Massachusetts, 471 U.S. 724 (1985).
- Metropolitan Life, 471 U.S. at 746-47.
- E.g., California Division of Labor Standards v. Dillingham Construction Co., 519 U.S. 316 (1997).
- 42 U.S.C. § 12201 (1994).