What is an ERISA Plan?
Rebecca J. Miller McGladrey & Pullen, LLP Becky.miller@rsmi.com
McGladrey & Pullen, LLP is a member firm of RSM International – an affiliation of separate and independent legal entities.
... the entire case looms in ERISA’s
dark,
federal shadow....
Vencor Hospitals East Inc. v. Smithfield Foods, Inc. - 2000
59-1
Overview
• • • • • • What is ERISA? What is a plan? What Benefit Plans are not subject to ERISA? What Pension Plans are subject to ERISA? What Welfare Plans are subject to ERISA? What are the Consequences of ERISA Plan status?
Still an Issue
• ERISA will be 30 years old this fall • 2004 - First advisory opinion of the year on this topic. • 2003 – Out of 18 advisory opinions 7 were on this topic.
59-2
What is ERISA?
• Primary Federal legislation covering non-government pension and welfare benefit plans. • Intent to protect participants. • Rules governing communication, eligibility, vesting, funding, investment management, etc. • Numerous revisions to add other levels of security health coverage continuation, mothers and newborns, pre-existing conditions, etc.
Basic Concepts
• Employee/Employer • Benefit Plan
– Pension Plan – Welfare Plan
• Employee Organization
59-3
Benefit Plan
• • • • • Benefits Participants/Beneficiaries Source of Financing Administrative system for providing benefits Not required to be in writing
Distinction between types
• Pension Plan
– Focus of original ERISA provisions • Accrual • Funding • Vesting
• Welfare Plans
– Focus of more recent action • COBRA • HIPPA • Mothers and Newborns • Mental Health Parity
Reporting and disclosure apply to both. Fiduciary conduct to all plan assets.
59-4
Pension Plan
• Sponsored by employer • Provides retirement income to employees, or • Results in deferral of income by employees through termination of employment or beyond.
Welfare Plan
• Sponsored by employer • Provides medical, surgical or hospital care • Accident, sickness, disability, death, unemployment or vacation benefits • Apprenticeship or other training, day care centers, scholarship funds or prepaid legal services • Any benefit described in Section 302(c) of the LMRA
59-5
Employee
• • • • • Common-law employee Watch worker classification debate Not 100% shareholder or spouse Not partners Both of above may be beneficiaries
What Benefit Plans are not subject to ERISA?
• Government plans • Church plans • Plans to comply with worker’s compensation, unemployment compensation, etc. laws • Unfunded excess benefit plans • U.S. plans to cover nonresident aliens
59-6
What Pension Plans are subject to ERISA?
• Plans to defer income to retirement or termination, except:
– Severance pay plans • Not pension = welfare. • Remember differences in ERISA impact – Bonus plans – IRAs and TSAs – Examples - see outline
What Welfare Plans are subject to ERISA?
• Listed employer provided benefits, except:
– Payroll practices – On premises facilities – Gifts, discounts, remembrance funds, strike funds, tuition reimbursements – Certain group or group-type insurance programs – Savings programs – Examples - see outline
59-7
How many plans?
• • • • Emerging trend Particularly for welfare plans How many filings, documents, SPDs, etc. Recommendation - Don’t mix ERISA and nonERISA plans.
What are the Consequences of ERISA Plan status?
• • • • • Subject to ERISA - duh! Uniform Bankruptcy protection Federal Access for problem resolution State Preemption Statute of Limitations
59-8
Problem Resolution
• Parties with standing to sue
– – – – Participants Beneficiaries Fiduciaries DOL
• • • • •
Administrative Remedies Attorney Fees Where to take the case? Jury Trial? Damages
State Preemption
• • • • • ERISA rules Fundamental issue is relates to an ERISA plan Insurance clause is an exception Doesn’t extend outside U.S. Non-ERISA benefits or participants may be subject to State law
59-9
KEY CONSIDERATION
• State law - COMPENSATORY DAMAGES • ERISA - NO COMPENSATORY DAMAGES • Think HMOs, executive compensation agreements....
Statute of Limitations
• ERISA Standard on Fiduciary Breach - period • No statute on Form 5500 • Otherwise go to State standards
– 3 months to 20 years! – Lost wages, lost benefits, worker’s compensation or contract law.
• Lots of lost claims due to tolling of statute • Plan can set its own term
59-10
Implications
• • • • Know your statute[s] Look at where you participants live Effectively advise of administrative remedies Watch out for internal devices that seem to limit the statute of limitations
59-11
WHAT IS AN ERISA PLAN?
Rebecca J. Miller, CPA McGladrey & Pullen, LLP Updated April 2004 ________________________________________________________ I. What is ERISA? Employee Retirement Income Security Act of 1974. Includes labor, tax and other provisions governing the operation of certain employee benefit plans. The purpose of this presentation is to help determine when a plan is subject to ERISA. A. Employee benefit plan or plan means an employee welfare benefit plan or an employee pension benefit plan or a plan which is both an employee welfare benefit plan and an employee pension benefit plan. B. Employee pension benefit plan and pension plan mean any plan, fund, or program established or maintained by an employer or by an employee organization, or by both, to the extent by its express terms or as a result of surrounding circumstances, the plan, fund, or program: 1. Provides retirement income to employees, or 2. Results in deferral of income by employees for periods extending to the termination of covered employment or beyond. This classification is made without regard to 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. C. Employee welfare benefit plan and welfare plan mean any plan, fund, or program established or maintained by an employer or by an employee organization, or by both, to the extent the 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 any of the following list of benefits. These benefits can be provided by separate plans or through a single arrangement. 1. Medical, surgical, or hospital care 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 2. Any benefit described in Section 302(c) of the Labor Management Relations Act, 1947 (other than pensions on retirement or death, and insurance to provide such pensions). 3. The effect of number two is to include holiday and severance benefits, and benefits that are similar (for example, benefits that are in substance severance benefits, although not so characterized). D. Plan is another term not specifically defined by the statute, though it is implicit in the prior two definitions. In Donovan v. Dillingham (3 EBC 2122, 3 EBC 1073, 5 EBC 2092, 688 F2d 1367 (1983)), the court set the
59-12
McGladrey & Pullen, LLP – Rebecca J. Miller
fundamental standard for measuring whether or not an arrangement contained sufficient form to constitute a "Plan." These are that the arrangement must specify: 1. Benefits 2. Beneficiaries 3. Source of financing, and 4. Procedures for receiving benefits. See for example, Diak v. Dwyer, Costello Knox, P.C. (CA-7, 33 F3d 809, 1994 U.S. App. Lexis 23312). In this case a professional corporation had provided a post-employment stream of retirement income payments to 4 of the roughly 20 persons who had retired during the period in question. The amount of the payments was not based upon identical terms. The payments were paid out of the general assets of the employer. One received only post-employment health coverage. The conditions for eligibility could not be determined from the group covered. The starting date for payments was not uniform. There was nothing in writing. The Court concluded that no ERISA plan existed. The fact that this position still holds true is demonstrated in Belanger v. Wyman-Gordon, Co. (USCA 1st Circuit, CA-1, No. 95-1704, 12/14/95). In this case, the company had entered into a series of early retirement incentives over a four-year period. Each involved a one-time, lump-sum payment. The decision was that even though there were serial offers over a four-year period, it did not rise to the level of a "plan" for ERISA purposes. A similar finding has been made with respect to welfare benefit plans. Most of the rulings relate to severance pay. See Angst v. Mack Trucks, Inc. (969 F2d 1530, 3rd Cir. 1992) regarding Golden Parachute arrangements, Fort Halifax Packing Co. v. Coyne (482 U.S. 1 (1987)), Wells v. General motors Corp. (881 F2d 166 (5th Cir. 1989), Fomtempt v. NL Industries (953 F2d 960 (5th Cir. 1992), Pane v. RCA Corp. (868 F2d 631 (3rd Cir. 1989) and Kulinski v. Medtronics Bio-Medicas, Inc. (21 F3rd 254 (8th Cir. 1994)). E. Employee organization means any labor union or any organization of any kind, or any agency or employee representation committee, association, group, or plan, in which employees participate and which exists for the purpose, in whole or in part, of dealing with employers concerning an employee benefit plan, or other matters incidental to employment relationships; or any employees' beneficiary association organized for the purpose in whole or in part, of establishing such a plan. 1. Under these criteria, in order to conclude that an association or organization is an "employees' beneficiary association" within the meaning of ERISA section 3(4), the Department must find that: a. Membership in the association is conditioned on employment status--for example, membership is limited to employees of a certain employer or union; b. The association has a formal organization, with officers, bylaws or other indications of formality; c. The association generally does not deal with employers (as distinguished from organizations described in the first part of the definition of "employee organization", e.g., labor union); and
d. The association is organized for the purpose, in whole or in part, of establishing a welfare or pension plan.
59-13
McGladrey & Pullen, LLP – Rebecca J. Miller
2. For further discussion, see DOL Advisory Opinion 95-01 discussing a race track association sponsorship of a plan that was allowed to include persons who were considered self-employed. Since not all members were "employees" the health plan sponsored by the association was not an ERISA plan. See also Moideen v. Gillespie (CA 9, 6/7/95, 19 EBC 1708) for a discussion of an association formed solely to acquire group benefit coverage. Employment relationship was not required, so no ERISA plan. F. Employer means any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan; and includes a group or association of employers acting for an employer in such capacity. 1. See DOL Advisory Opinion 2003-13 regarding when a trade association may rise to the status of being considered a single employer with respect to the operation of a plan. G. Employee means any individual employed by an employer. This is a common-law employee concept, as opposed to the more generic term “worker.” But, watch out for this whole worker classification debate. See Vizcaino v. Microsoft Corp., CA-9 (1997), 120 F3d 1006 (en banc), aff'g CA-9 (1995), 97 F3d 1187 and Administrative Committee of The Time Warner, Inc. Benefit Plans v. Gloria Biscardi, et al., United States District Court, Southern District of New York, No.99 Civ. 12270 (DLC), November 17, 2000. Self-employed persons and their spouses, partners in a partnership and 100 percent shareholders of a corporation are not considered to be employees under ERISA for purposes of the determination of whether or not a plan is subject to ERISA, see Reg. 2510.3-3(c). Note however, if the plan covers these persons and bona fide ERISA employees, that plan is fully subject to all aspects of the Act. For a discussion of the ERISA issues related to partners, see Robertson v. Alexander Grant & Co. (798 F2d 868 (5th Cir. 19886)) and Simpson v. Ernst & Young (850 F. Supp 648 (S.D. Ohio 1994)). See the recent Supreme Court decision - See the recent Supreme Court decision – Raymond B. Yates M.D. P.C. Profit Sharing Plan v. Hendon, 124 S.Ct. 1330, 32 EBC 1097 2004.This Supreme Court decision was rapidly followed by Daniels v. Bursey, N.D. Ill., No. 03 C 1550,3/18/04 which related to the rights of the partners in a law firm to enter into an ERISA suit in a severance pay case. Watch out for the timing on other recent cases. For example, Pearl v. Monarch Life Insurance Co., E.D.N.Y., No. 03-CV-2788 (TCP) 10/30/03 is probably wrong in light of Yates. Even after Yates, there continues to be an absence of discussion on what happens if a plan that covers ERISA employees ceases to cover such persons. For example, if a partnership includes common law employees in their plan subjecting it to ERISA and subsequently terminates all common law employees, so that only partners are covered by the plan. Is the determination based upon once an ERISA plan, always one? Or can a plan go in and out of ERISA? For some discussion see International Resources, Inc. v. New York Life Insurance Co. (950 F.2d 294 (6th Cir. 1992)). However, this case deals with a 75 percent owner of a corporation, so the plan was not clearly outside of ERISA, anyway. Recent case law has been very critical of the ERISA definition of employee. In both Nationwide Mutual Ins. Co. v. Darden (14 EBC 1728 and 2625, US SupCt, 90-1802and 922 F2d 203) and Madonia v. Blue Cross and Blue Shield (17 EBC 1769, 4th Cir. 1993). The Darden case is the decision that a independent sales agent for an insurance company could be considered an employee for ERISA purposes.
59-14
McGladrey & Pullen, LLP – Rebecca J. Miller
In making its holding the Court noted: ERISA's nominal definition of an "employee" as "any individual employed by an employer,"...is completely circular and explains nothing. The Court went on to hold that Mr. Darden must be evaluated as an ERISA employee or not under the old 20 factor common-law test. For example where an agent was considered an employee under this logic, see Keleher v. Dominion Insulation, Inc. (1992, CA4) 1992 US App Lexis 25561, (unpublished) and Fraver v. North Carolina Farm Bureau Mutual Insurance Co. (801 F2d 675 (4th Cir. 1986)). The Madonia case dealt with whether or not a 100 percent shareholder was an employee for other ERISA purposes. The case concluded that the 100 percent shareholder was an employee for purposes of other ERISA protections. Note this case was an effort to escape from the ERISA preemption to enable a claim against the health coverage carrier for breach of contract. For a contrasting view see Kelly v. Blue Cross & Blue Shield of Wisconsin (16 EBC 1809, 814 FSupp 220). II. What Benefit Plans Are Not Subject to ERISA? ERISA Section 4 defines certain arrangements that are simply outside of the terms of ERISA. A. Governmental Plans - See ERISA Section 3(32) for a definition of a governmental unit. Fundamentally, these are plans of the United States, any State or political subdivision of the State or any agency of any governmental unit. This exemption is not crystal clear when applied to some of the smaller subdivisions or pseudo-governmental units. To be a governmental plan, a political subdivision must be clearly in control. For some insight into these concepts, see Rose v. Long Island Railroad Pension Plan (828 F2d 910 (2nd Cir. 1987)) and Lumber Industry Pension Fund v. Warm Springs Forest Products Industries 937 F2d 683 (9th Cir. 1991)). 1. DOL Advisory Opinion 2004-01 discusses some of the intricacies of this rule. This deals with 2 health funds and one legal services fund of the Boston Teachers Union. The school district and the union jointly run these plans. The department concluded that the plans retain their character as governmental plans, exempt from ERISA. Here the was based upon past recognition that school districts were political subdivisions. 2. DOL Advisory Opinion 2003-18 deals with the issue of what constitutes a political subdivision. Glynn county and the city of Brunswick, Georgia formed a Hospital authority. This entity was formed under enabling state legislation. A defined benefit pension plan was established in 1968. This ruling concluded that the plan was not subject to ERISA, as a plan of a political subdivision. 3. Similarly, see DOL Advisory Opinion 2003-16 dealing with Lower Colorado River Authority and DOL Advisory Opinion 2002-9 dealing with the Port Authority of New York Police Benevolent Association. 4. See DOL Advisory Opinion 2003-12 dealing with the participation of employees of the Council of State Governments in the Kentucky Retirement System. Though the Council was organized to benefit all states, protectorates, etc., it was physically located in Kentucky. The inclusion of Council employees in the Kentucky plan was held not to jeopardize the classification of the Kentucky plan as a governmental plan under ERISA. See also Advisory Opinions 81-82 and 84-23, which dealt with similar relationships. 5. See DOL Advisory Opinion 2002-11 relating to the extension of plan coverage to persons not employed by a political subdivision, but by the union whose employees are employed by a political subdivision. Because the inclusion of the fund trustees as participant would add a de minimus number of persons
59-15
McGladrey & Pullen, LLP – Rebecca J. Miller
who are not employed by a political subdivision, the plan is still a governmental plan, exempt from ERISA. 6. See DOL Advisory Opinion 2002-10 dealing with recognizing years of service for public sector employees for the time period that they were employed by a private sector joint venture. The joint venture was between the governmental agency and a private enterprise. The granting of such credit was judged not to disrupt the status of these plans as governmental plans. B. Church Plans - A church plan is defined in ERISA Section 3(33). This is a very long definition. It is important to note that the exemption does not apply to business activities carried on by a church. C. Plans maintained solely to comply with the applicable workmen's compensation laws, unemployment compensation laws or disability insurance laws of a particular state. D. Plans maintained in the U.S. to benefit nonresident aliens. E. Unfunded Excess Benefit Plans - these are plans created solely to provide benefits in excess of what is available under IRC Section 415. Note, to be wholly exempt from the law, the plan must be unfunded, but a partial exemption exists for funded plans. See Petkus v. Chicago Rawhide Manufacturing Co. (763 F. Supp 357 (N.D. Ill 1991)), Gamble v. Group Hospitalization and Medical Services (38 F3d 126 (4th Cir. 1994)) and Farr v. U.S. West, Inc. (CIV 91-1886-MA (D. Ore. 1992)). These cases are material as they relate to the interrelationship of these excess benefit plans with the underlying ERISA plan, yet retain the exempt status of the excess plan. For the IRS's perspective on these arrangements, see PLR 9504013 and 9420015. Remember, the IRS does not control in this area. F. Unsettled Issues – Plans of Native Americans that cover persons who are not members of the tribe – e.g. casinos, hotels, etc. See HR 3605, the Government Pension Plan Equalization Act of 2003, currently sitting in committee for some understanding of this issue. 1. See Prescott v. Little Six Inc., D. Minn., No. 02-4741, 9/30/03. III. What Pension Plans Are Subject to the Act? A. General rule – Any arrangement that serves to defer earnings from the current period to termination of employment or attainment of a specified retirement age are considered pension plans. B. Exception: Plans not considered pension benefit plans for ERISA purposes. See DOL regulations at 2510.3-2. 1. Severance pay plans if: a. Such payments are not contingent, directly or indirectly, upon the employee's retiring. b. The total amount of such payments does not exceed the equivalent of twice the employee's annual compensation during the year immediately preceding the termination of his service. c. All such payments to an employee are completed.
This definition only goes to the character of the arrangement as a pension plan; if these rules are met it is still an ERISA welfare plan.
59-16
McGladrey & Pullen, LLP – Rebecca J. Miller
Note, just because something appears to meet the terms of ERISA, as a severance pay plan, it does not mean that it is one for all purposes of Federal law. Dr. Harry Wellons learned that the hard way. See Wellons v. Commissioner (18 EBC 1673, CA-7, 932991, 8/4/94). The plan provided for a payments equal to 21 weeks of average weekly compensation for each year of service, not to exceed 2 times salary for the prior full year of employment preceding termination. Payments must have been made within 24 months of termination. They were paid for any termination after five years of employment, other than for cause. In spite of the compliance with the ERISA parameters for severance pay, the Court held that this was a deferred compensation agreement, subject to IRC Section 404(a)(5). This holding impacted the timing of the deduction, whether it was subject to payroll taxes, etc. See also, Anthony Cvelbar v. CBI Illinois, USCA, 7th Cir. No. 96-1669. This case held that a contract between an employer and an employee was an ERISA plan. It provided a lump-sum severance payment, ongoing medical benefits and monthly pension payments. As such, it was help to require ongoing administration. In that world of ignorance is no defense, see Davis. V. Commercial Bank of New York, S.D. N.Y., No. 02 Civ. 1913 (SAS), 6/17/03 where the Court concluded that the fact that the employer did not know it had an ERISA plan didn’t result in state law governing, rather than ERISA. 2. Bonus Programs - bonuses for work performed, unless such payments are systematically deferred to termination of covered employment or beyond, or so as to provide retirement income to employees. Note, this is a facts and circumstances test. The DOL Advisory Opinions issued in this area look to the period of deferral and the employment expectations of the covered members. However, a short deferral period, such as three years, covering a broad group of employees is probably acceptable without any detailed demographic testing. This is a tremendous planning point to get a degree of deferral for incentive programs without becoming subject to all of the detailed aspects of ERISA. However, these arrangements are considered deferred compensation under the Code, subject to IRC Sections 404(a)(5) and 3121(v). For the timing on the recognition of the FICA taxes, see the final regulations under IRC Section 3121(v). a. See DOL Advisory Opinion 2002-13 for discussion of a complex incentive pay program with deferral elements that was not considered an ERISA pension plan. 3. Individual Retirement Accounts and Tax Sheltered Annuity Programs if: a. No contributions are made by the employer or employee organization; b. Participation is completely voluntary for employees or members; c. The sole involvement of the employer or employee organization is without endorsement to permit the sponsor to publicize the program to employees or members, to collect contributions through payroll deductions or dues check-offs and to remit them to the sponsor;
d. The employer or employee organization receives no consideration in the form of cash or otherwise, other than reasonable compensation for services actually rendered in connection with payroll deductions or dues check-offs.
59-17
McGladrey & Pullen, LLP – Rebecca J. Miller
4. Other Exceptions: Certain Gratuitous Payments to Pre-Act Retirees and Supplemental payment plans. 5. Examples: The following examples are all taken from ERISA Opinion Letters and court cases. Advisory Opinions are letters of guidance issued by the Department of Labor in response to specific requests of plan sponsors or their advisors. These have roughly the standing of private letter rulings issued by the IRS in that they are factually specific. a. A police benevolence association was held to be an employee organization and their benefits program an employee welfare benefit plan and employee pension benefit plan. Contributions were made to provide three types of benefits to active members: pension benefits, death benefits, and payments to defray the cost of funeral expenses. Active members were members of the city police force. The members elected the board of directors and paid dues to fund benefits. See DOL Advisory Opinion 92-19A. This ruling is of particular interest, as a particular employer did not form the organization. Instead it was a voluntary organization formed by the employees. b. A voluntary separation program that ties distributions to retirement is an ERISA plan. See DOL Advisory Opinion 99-01A. c. An incentive compensation plan that defers payment for five years from the time the bonus is awarded is not considered an employee pension benefit plan within the meaning of Section 3(2) of title I of ERISA. Persons not employed at the end of the five-year period are not eligible to receive the payments indicating that the plan is not a vehicle for the provision of retirement income. In other words, this arrangement met the exception for bonus payments, see DOL Advisory Opinion 89-07A.
d. A comprehensive discussion about ERISA and deferred compensation arrangements is found in DOL Advisory Opinion 92-13A. This discusses the coverage rules, funding and vesting. Note, however, the concept of "a select group of highly compensated employees or management" is still poorly understood. See Belka v. Rowe Furniture Corp., (571 F. Supp 1249 (D. Md 1983)) and Simpson v. Ernst & Young, (879 F. Supp. 802 (S.D. Ohio 1994)). e. DOL Advisory Opinion 95-23A provides that an incentive stock bonus plan that triggers payout upon a change in control is not an ERISA plan, as it does not defer compensation to retirement or separation from service. f. A trust established by several school districts and public educational agencies to provide certain benefits, specifically a 401(k) plan as an alternative to the state sponsored plan, to its members is considered to be a governmental plan within the meaning of section 3(32) of title I of ERISA and is excluded from ERISA coverage. See DOL Advisory Opinion 87-08A. This situation highlights the blanket exemption from ERISA for governmental plans. Note, to retain qualified status for the plan, they still need to meet the majority of the rules of the Internal Revenue Code. There are simply no ERISA filings due for this arrangement.
g. ERISA was held not to apply to a stock purchase plan designed to reward past service. Employees who agreed to a transfer were allowed to purchase shares at a reduced price. Though this arrangement was designed to replace benefit accruals lost under the pension plan due to the transfer, that linkage was not sufficient to classify the purchase program as an ERISA plan. See Lafian v. Electron Data Systems Corp. (856 F. Supp 339 (E.D. Mich 1994)). h. An airplane pilot on the personal staff of a wealthy individual is not entitled to pension benefits from the person's estate, where pilot claimed that unwritten plan was in existence but where pilot did not
59-18
McGladrey & Pullen, LLP – Rebecca J. Miller
produce any specific criteria for participation in alleged plan, since pilot did not adduce sufficient evidence to provide his eligibility and participation in alleged plan. See McVeigh v. Philadelphia National Bank (CA 3, 3/8/93) 2166. Note, what is critical about this case is the fact that the employer/employee relationship did not have to take place within a commercial setting to be potentially subject to ERISA. The Court admitted the employer/employee relationship, but denied the claim for the absence of proof. ERISA does require a written document. i. Employer's career bonus plan, which permits sales representatives to withdraw vested portion of their plan allocations at any time during their employment, is not employee benefit plan under ERISA, since plan does not provide for systematic payment deferral. See McKinsey v. Sentry Insurance (CA 10, 2/19/93) 2153. Employer's plan that consisted of oral promise to pay employees with five years of service $1,000 for each year worked until their retirement at age 62 was ERISA-covered pension plan, where reasonable person could ascertain intended benefits and beneficiaries, where plan substantially mirrored ERISA Section 203's minimum vesting requirements, where source of financing -apparently employer's general assets -- is ascertainable, where plan procedures, although simple, are sufficiently ascertainable to establish ERISA plan, and where, as employer paid promised retirement benefit to at least one other employee, plan was more than mere oral promise to provide retirement benefits. See Moeller v. Bertrang (DC SD, 8/24/92) 1469. Note, though ERISA requires a written plan, the Courts have been loath to eliminate a plan from the protection of ERISA for the simple failure to reduce the plan to writing. The judges repeatedly rule that such a narrow view of the scope of ERISA would make it too simple for plan sponsors to escape ERISA's terms. k. Employee's deferred compensation and incentive compensation plans are ERISA-covered plans, since each provides retirement income and/or deferral of income, clearly describe benefits available thereunder, are made available to highly paid, managerial-level employees, to which class employee belonged, and establish explicit computations to calculate benefits due, and since absence of particularized funding trust is not necessarily fatal to existence of ERISA plan. See Healy v. Rich Products Corp. (DC WNY, 4/1/91) 2083, CA-2 (1992), No. 92-7398; 16 EBC 1112. Employer's promise in letter to provide retiring employee with monthly retirement payments and life and health insurance coverage established ERISA-covered plan, since employer's payment of benefits from its general assets does not affect question of ERISA coverage, since letter provided sufficiently ascertainable standards for employee to receive benefits, since, where other ERISA plan requirements are met, plan covering only single employee is ERISA-covered plan, and since letter contemplated payment of retirement income and not payment of current benefits under employment contract outside scope of ERISA. See Williams v. Wright (CA 11, 4/11/91) 2137. This is a substantial case in this area. It is very common to make promises for income continuation agreements in severance packages. Such informal commitments may create an ERISA plan and subject the arrangement to all of the reporting and disclosure rules of ERISA, in addition to the other enforcement provisions. But see, Barbara J. Kemp; Maria G. Wilson; Roger Wilson, Plaintiffs-Counter-Defendants-Appellees, v. International Business Machines Corporation, USCA 11, 95-9223. April 8, 1997which held that State claims for educational benefits not covered by ERISA did not fall within the scope of ERISA preemption merely because the benefits were included in a summary plan description along with ERISA benefits.
j.
l.
59-19
McGladrey & Pullen, LLP – Rebecca J. Miller
m. The concept of the accidental ERISA plan is becoming more and more contentious. See Randol v. Mid-West Life Ins. Co. of Tennessee, (967 F2d 1547, 1551 (11th Circuit 1993). See also, DOL Adv. Opinion 91-20 (the concept of a one person "plan", Strzelecki v. Schwarz Paper Co. (824 F. Supp 821 (ND Illinois, 1993)) - an oral agreement with one person for the repurchase of stock was the same as a phantom stock plan, Biggers v. Witeteck Industries, Inc. (4 F3d 291 (4th Circuit 1993)), Modzelewski v Resolution Trust Corp. (14 F3rd 1374 (9th Circuit 1994)), Silverman v. Barbazon School of Modeling & Fashion, Inc. (720 F. Supp 966, 972 (SD Florida 1989)), linking of stock option plan to an ERISA plan made both subject to ERISA and Peckham v. Gem State Mutual Of Utah (964 F2d 1043, 1049 (10th Circuit 1992)), this is another one person plan. n. Employer's service award policy adopted by corporate resolution is ERISA-covered pension plan despite lack of other documentation, since record established that intended benefits were monthly pensions after retirement, that beneficiaries were company employees, that company's general assets were funding source, and that there were procedures for obtaining benefits, since no formal written plan is required for plan to be established and maintained, and since there is no evidence that employer complied with notification requirements to qualify for ERISA exception for gratuitous payments to pre-ERISA retirees; compliance with ERISA's reporting and fiduciary provisions is not prerequisite for plan's coverage by law. See Hollingshead v. Burford Equipment Co. 747 FSupp. 1421, 1434 (M.D. Ala. 1990), 809 F. Supp. 906 (M.D. Ala. 1992). o. A top-hat plan that was offered to 15 percent of the employees was still an exempt top-hat plan. Demery v. Extebank Deferred Compensation Plan (B), 2d Cir. No. 99-7002, 6/15/2000. Note that this case also includes some discussion on the definition of funded. IV. What Welfare Plans Are Subject to the Act? A. As above, most of the answers to this question come in the negative. See ERISA Regulation 2510.3-1. Benefits not considered welfare benefit plans include: 1. Payroll practices. a. Payment for work performed including premium rates. b. Payment of normal compensation from the general assets of the company for periods of time when the employee is unable to perform his/her duties, or is able to perform, but performs no duties. c. See also Eatherton v. Jet Plastica Industries, Inc. CA 3, No. 97-1001, 8/20/97. Here the Third Circuit ruled that salary continuation payments are wages, not pension benefits.
d. On vacation pay, see Miller v. PPG Industries, Inc. W.D. Ky., No. 3:02CV-534-H,8/22/03S 2. On premise facilities - health clubs, first aid, etc. 3. Holiday gifts. 4. Discount prices to employees. 5. Remembrance funds. 6. Strike funds. 7. Tuition reimbursements.
59-20
McGladrey & Pullen, LLP – Rebecca J. Miller
8. Certain group or group-type insurance programs under which, a. No contributions are made by an employer or employee organization; b. Participation in the program is completely voluntary for employees or members; c. The sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues check-offs and to remit them to the insurer; and
d. The employer or employee organization receives no consideration in cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues check-offs. These conditions are very similar to those applied to IRAs and TDAs for the exemption from classification as a pension plan. An excellent summary of how these restrictions are to be interpreted is found in Johnson v. Watts Regulator Co., et al (95-1002.01a (1st Cir. 8/23/95). See also Hansen v. Continental Inc., Co. (940 F2d 971 (5th Cir. 1991)). Finally, see Robinson v. Linomaz (58 F3rd 365, 368 (8th Cir. 1995)) where the mere purchase of an insurance contract was held to create an ERISA plan. In contrast, the promise to provide health coverage did not create an ERISA plan even though the employer began reimbursing the employee for medical costs incurred. See Curtis v. Nevada Bonding Corp. (53 F.3d 1023 (9th Cir. 1995). 9. Health Savings Accounts – See Field Assistance Bulletin 2004-1, where the department concluded that such arrangements are not ERISA plans, even if the employer makes contributions. Note that this conclusion is different from the regulatory guidance for 403(b) plans. 10. Employee savings programs not through a retirement plan, such as U.S. savings bond purchase or holiday savings plans. B. Benefit Arrangements Considered Subject to the Act - See ERISA Reg. Section 2510.3-1(a)(2) 1. Health Plans - This includes insured benefits, self-insured benefits and medical reimbursement accounts under a cafeteria plan. 2. Dependent Care Facilities - The law is quite specific. Facilities are included but not dependent care reimbursement programs. 3. Funded programs with respect to payroll practices. As noted above, unfunded payroll practices are not subject to ERISA. However, the creation of a separate funding agency, such as a VEBA subjects the arrangement to ERISA. This may be helpful with respect to certain state mandated benefits, as subjecting the arrangement to ERISA triggers the ERISA preemption of state law. For example, this technique is carefully used by some California employers to avoid the mandated vesting of vacation pay otherwise required by California state law. Note, the VEBA needs real substance for this to work. 4. Death benefit plans such as life insurance or self-insured death benefits, but not remembrance funds.
59-21
McGladrey & Pullen, LLP – Rebecca J. Miller
5. Scholarship Funds are subject to the Act, but unfunded scholarship benefits are not. This can create a conflict on the interpretation of tuition reimbursement programs. 6. Severance pay programs that meet the exemption from being classified as an ERISA pension plan are ERISA welfare plans. 7. Prepaid legal services. 8. Disability income plans, whether short-term or long-term, funded or unfunded. 9. Apprenticeship and other training programs. 10. Unemployment compensation programs in addition to the mandated benefits. C. The following are examples of welfare plans extracted from Department of Labor Advisory Opinions and court cases. These are included to give some insight into specific plan designs that may have unexpected consequences, e.g. a plan where one would not expect to see one or no plan where one might expect to find one. 1. ERISA opinion letters. a. A dependent care spending account plan is not an employee welfare benefit plan. DOL Advisory Opinion 91-25A. b. Referrals by means of providing toll-free numbers for counseling hotlines and not actually providing medical or counseling benefits does not constitute an employee welfare benefit plan. DOL Advisory Opinion 91-26A. c. Employer's payment of less than normal compensation from the employer's general assets during periods in which an employee is absent for medical reasons may constitute a payroll practice that is not an employee welfare benefit plan. DOL Advisory Opinion 93-02A.
d. A Short-term disability payment from the company's general assets is not an employee welfare benefits plan. DOL Advisory Opinion 92-18A. e. A plan that expressly states that it is covered by ERISA and adds benefits that are not expressly listed as covered benefits in ERISA section 3(1) is still considered to be an employee welfare benefit plan. DOL Advisory Opinion 92-12A. f. Supplemental disability payments by an employee organization funded by a trust is an employee welfare benefit plan. DOL Advisory Opinion 93-09A.
g. Out-placement assistance is not a welfare benefit plan. DOL Advisory Opinion 97-12A. h. A trust arrangement that provides nominal benefits upon the completion of a training course is not an ERISA plan. DOL Advisory Opinion 98-09A. i. A travel pass program is not an ERISA plan. DOL information letter issued to Verner, Liipfert et al on March 26,1999. The DOL stated that they believed that the issue was already covered in DOL Advisory Opinion 81-39A.
59-22
McGladrey & Pullen, LLP – Rebecca J. Miller
j.
DOL Advisory Opinion 2003-6 deals with the Labor Management Construction Safety Alliance, Inc. This is a non-stock, not-for-profit organization whose purpose is to encourage safety and health programs in the construction trades and their support services – insurance, etc. Though the organization touches on benefit issues, it does not provide benefits as defined in the statute. As such, it was concluded not to be an ERISA plan.
2. Court Cases - It is interesting to note that many of the following cases are very recent. One would think that where the statute is nearly 30 years old, some of these basic issues would have been resolved long ago. a. Employee does not have claim under ERISA for 60-days' severance pay after discharge, where employer orally told employees that if they continued to work until internal consolidation was completed they would receive 60-days' additional pay following last day of work, and employer later canceled 60-days' pay, since simple arithmetical calculation and clerical determination that employer was required to make to ascertain each employee's severance pay did not meet ERISA's standard for creation of employee welfare benefit plan and therefore ERISA did not cover alleged offer. See James v. Fleet/Norstar Financial Group, Inc. (CA 2, 5/4/93) 2302. See also Peter D. Collins v. Ralston Purina Company, et al, 22 EBC 1417, United States Court of Appeals Seventh Circuit, No. 97-1925. b. Health insurance policy obtained by employees with employer's assistance is employee welfare plan under ERISA, where employer contributed $75 per month per employee toward cost of monthly premiums and employer wrote check for full amount of premium to insurer and deducted employees' contributions from their paychecks, since purchase of insurance fits statutory definition of plan and employer maintained plan as defined by ERISA. See Randol v. Mid-West National Life Insurance Co. of Tennessee (CA 11, 4/12/93) 2037. c. Employer established ERISA welfare plan when it purchased group medical insurance policy from multiemployer trust, where policy was administered by trust and underwritten by insurer, since employer selected plan, paid premiums, and provided policy coverage to all its employees as employee benefit, and since fact that employer's majority shareholder is now employer's only employee does not transform what was already ERISA plan into non-ERISA plan. See International Resources, Inc. v. New York Life Insurance Co. (CA 6, 11/26/91) 15 EBC 1588.
d. ERISA does not govern employer/union negotiated severance plan, which provided employees who voluntarily left company with $75,000 lump sum payment and with one year of continued employee benefits, since neither lump sum payment nor disbursement of benefits for one year requires creation of new administrative scheme, but rather simply requires continuation of existing procedure. See Angst v. Mack Trucks, Inc. (CA 3, 7/21/92) 15 EBC 2253. e. Group accidental death insurance plan is ERISA welfare benefit plan, where employer's function regarding plan was not limited to publicizing plan to its employees and collecting and remitting premiums to insurer, but included assuming responsibility for plan's administration and benefit payments, since Labor Department regulations include such activity within plan coverage; employer's presenting policy as supplement to other benefit plans provided by employer clearly signaled employer's intent to provide benefit plan for its employees; plan beneficiary's state law claim seeking increased plan benefits was therefore properly removed to federal district court. See Hansen v. Continental Insurance Co. (CA 5, 9/10/91) 1909, 940 F. 2d 971. f. Employee handbook that outlined severance pay benefits including printer's error describing benefits that were higher than those provided under employer's actual, unwritten severance pay
59-23
McGladrey & Pullen, LLP – Rebecca J. Miller
policy constituted employer's ERISA plan in absence of any other written description of benefits, since ERISA Section 402 requirement that every employee benefit plan be "established and maintained pursuant to a written instrument" prevents oral modifications and unwritten amendments from being enforceable part of ERISA plan. See Hamilton v. Air Jamaica, Ltd. (CA 3, 9/30/91) 1393, 945 F.2d 74. See also John W. Anthuis v. Colt Industries 15 EBC 2360 United States Court of Appeals for the Third Circuit, Nos. 91-3670, 91-3674 and 91-3894, 91-3675, 913676 and 91-3893. g. Although Fifth Circuit precedent precludes any interpretation of Labor Department regulations defining employee welfare benefit plan that would lead to conclusion that employer's contribution of insurance premiums alone is sufficient to create a group health plan, employer's payment of premiums on behalf of its employees is substantial evidence that plan was established. See Kidder v. H & B Marine, Inc. (CA 5, 3/8/91) 1625. More recently, see Deborah J. Reber v. Provident Life & Accident Insurance Company, 2000 U.S. Dist. LEXIS 6409, March 29, 2000. h. Multiple employer welfare arrangement is ERISA welfare plan, since it was established by group of employers to provide health care benefits to their employees. See National Business Association Trust v. Morgan (DC WKy, 2/15/91) 1716. i. An employer's policy of providing vacation pay to employees from the general assets of the employer was not an ERISA plan. (Remember, the ERISA rules only refer to "funded" vacation pay arrangements.) See Massachusetts v. Morash, (490 U.S. 107, (1989)). Severance and vacation pay arrangements did not constitute an ERISA plan. The vacation pay was deemed to be an exempt payroll practice. The severance pay was under a one-time oral promise and was held not to rise to the level of a plan. See McPherson v. Maryland Public Employees Council 67, 942 F. Supp. 579 (U.S. Dist. Ct. MD 1996.) As noted above at I.G, one of the unanswered questions in ERISA is what happens when a plan once was an ERISA plan, but no longer meets these criteria. Does it lose its status as an ERISA plan. Though the following case does not specifically draw a conclusion on this matter, the implication is “once an ERISA plan, always an ERISA plan.” See Peterson v. American Life & Health Insurance Co., [CA 9 No. 93-55973, 2/15/1995 19 EBC 1326 48 F.3d 404] deals with a health insurance policy that initially covered 2 partners and their sole common-law employee. Clearly this arrangement was an ERISA welfare plan. After several years, one partner and the common-law employee became covered by a new contract from another insurer. Peterson stayed under the original contract because of coverage issues. In a dispute over covered healthcare, Peterson attempted to move the decision to state courts because the plan now covered only a partner. The Court held that the plan continued to be an ERISA plan, subject to Federal jurisdiction. Before relying too heavily on this holding, read the case. It appears that the Court combined both policies into a single plan of coverage. This conclusion was expanded upon in Dana LaVenture v. The Prudential Insurance Company of America, Inc. 2001 U.S. App. LEXIS 706, 1/19/2001. In that case a disability program that covered only owners was held not to be an ERISA plan, even though the company offered a health insurance plan that was an ERISA plan. Note, however, these were more clearly separate arrangements.
j.
k.
l.
m. A MEWA was held to be an ERISA welfare plan. See Mitchell v. Alabama Hospitality Association Inc., M.D. Ala., No. 00-D-1327-N, 3/5/2001.
59-24
McGladrey & Pullen, LLP – Rebecca J. Miller
n. A severance pay arrangement relative to a change of control was deemed an ERISA plan. See Antolik v. Saks, Inc., S.D. Iowa, No. 4:03-cv-90203,8/13/03. V. Filing Requirements for an ERISA Plan A. General Rules In general, the types of plans cited above, which are subject to ERISA are subject to extensive reporting and disclosure requirements. There are, however, some exceptions. These are found in the regulations, not the statute. To fully understand these rules, a couple of additional definitions need to be added: 1. Plan Assets: In a surprising oversight when ERISA was drafted, no definition was included of what was a plan asset. Final regulations covering this concept were adopted in 1986 and 1988. These are found at DOL regulation 2510.3-101 and 102. Basically, a plan asset is any asset that has been specifically set aside to provide plan benefits. This does not necessarily mean that the assets have to be held in trust to be considered plan assets. As experienced in recent years with the enforcement of salary deferral amounts, the funds are plan assets before they actually hit the plan. 2. Funded: A plan is funded if it either has plan assets or if it has a trust, even if that trust has no assets at a particular point in time. This is another evolving concept where the DOL has so far seemed reluctant to specifically define when a plan is funded. See for example, DOL Advisory Opinions 9202A, 92-24A, 94-31A, 84-10A or 81-32. a. A test for funding seems to be whether the participant or beneficiary can prove through the plan documents that they have a greater legal right to an asset, than an unsecured creditor. See for example, Miller v. Heller, et al. 1996 U.S. Dist. LEXIS 1665 (S.D.N.Y.). See also Demery v. Extebank Deferred Compensation Plan (B), 2d Cir. No. 99-7002, 6/15/2000. b. The DOL has recently entered this discussion with DOL Advisory Opinion 99-08A. This dealt with a special purpose trust established under a medical plan. The trust is intended to be a grantor trust and that assets may be invaded for any corporate purpose of the sponsor. Further, the trust does not grant the participants or their beneficiaries any special rights in these assets. One of the representations in the opinion was that the sponsor would not use such assets to offset their SFAS 106 obligations. 3. For recent discussion on funding see IT Group Inc. v. Bookspan , Bankr. D. Del., No. 02-10118 (MFW, 2/3/04). 4. Participant: The definition of a participant varies between welfare and pension plans. See ERISA Reg. Section 2510.3-3(d). a. Welfare plan: An individual is considered a participant on the earlier of the date designated by the plan as the entry date, the date the individual becomes contingently eligible subject to the occurrence of the contingency or the date on which they make a contribution to the plan either mandatory or voluntary.
59-25
McGladrey & Pullen, LLP – Rebecca J. Miller
b. Pension plan: i. Where the plan requires or allows employee contribution or defines participation to include employees who have not yet retired, a participant becomes eligible on the earlier of the date on which the individual makes a contribution or the date designated by the plan as the date on which the individual has satisfied the plan’s age and service requirements. This would be the general rule. Where the plan does not provide for employee contributions and does not define participation to include employees who have not yet retired, the date on which the individual completes the first year of employment which may be taken into account in determining either eligibility for benefits or the amounts of benefits. An employee ceases to be a participant in a pension plan when their entire balance has been distributed or they have separated from service, have incurred a one-year break in service and they have no vested balances in the plan. See Parsons v. W. Va. Workers Hourly Employee Pension Plan (1989 CA4, 879 F2d 130) and Nugent v. Jesuit High School of New Orleans (1980, CA5, 625 F2d 1285, 2 EBC 1173.) iii. Note, the key here is the right to enter the plan. Thus, persons who were never eligible for plan coverage have no standing under ERISA. See Arthur v. Bell Atlantic Corp. (1993, CA4 No. 93-1483, 1993 US App Lexis 31503) or Jackson v. Sears, Roebuck and Company (1981, CA5, 648 F2D 224, 5 EBC 1425). c. A related concept is beneficiary. See, e.g., Wolk v. Unum Life Insurance of America, 186 F.3d 352 (3d Cir. 1999) (partner was beneficiary and had standing under ERISA), cert. denied, 528 U.S. 1076, 120 S. Ct. 792, 145 L. Ed. 2d 668 (2000);); Peterson v. American Life & Health Ins. Co., 48 F.3d 404, 409 (9th Cir. 1995) (same); Harper v. American Chambers Life Ins. Co., 898 F.2d 1432, 1434 (9th Cir. 1990) (same).
ii.
B. Plans Exempt from Reporting and Disclosure - See ERISA regulations at 2520.104. 1. Unfunded or Fully Insured Small Welfare Plans - A small plan is one which has fewer than 100 participants. Note, a small plan that is funded, for example uses a VEBA, is not exempt from this filing. 2. Apprenticeship and Training Plans 3. Top-Hat Pension Plans - These are non-qualified plans of deferred compensation for select management or highly compensated employees. This is not a full exemption; a one-time filing is required. Failure to file this notice subjects the plan to all of the reporting and disclosure requirements of ERISA. 4. For recent discussion on what constitutes highly compensated see IT Group Inc. v. Bookspan , Bankr. D. Del., No. 02-10118 (MFW, 2/3/04). 5. Top-Hat Welfare Plans - This is similar to 3 above, except that no notice is required to be given to the Department of Labor. 6. Day Care Centers 7. Dues Funded Welfare Plans Filing under the LMRA.
59-26
McGladrey & Pullen, LLP – Rebecca J. Miller
8. IRS Model Simplified Employee Pension Plans C. Filing for Employee Pension Benefit Plans 1. All plans now file Form 5500 series, but this is another class. 2. Other filings needed: a. The summary plan description. b. A summary annual report. c. Modifications and changes.
d. Terminal and supplementary reports. e. Employee withholding and information reports. D. Filings for Employee Welfare Benefit Plans: As above, except no 2.d. or e. E. Special Rules 1. Section 403(b) plans: Employer sponsored 403(b) plans, i.e. plans that accept employer contributions, are subject to ERISA. However, these plans are subject to an abbreviated filing requirement. This omits the financial statements and the requirement for an auditor's report. This is in spite of the fact that there is nothing in the statute that exempts such plans from audit. 2. VEBAs: VEBAs are tax-exempt under IRC Section 501(c)(9); as such they are required to file a Form 990, in addition to the Form 5500 series report that is applicable for the related plan or plans. F. Penalties – See Lowe v. McGraw-Hill Companies, Inc., 7th Cir. No. 01 C 58, 03/15/04. Participant awarded $35,000 in penalties, plus $19,000 in legal fees because employer waited 2 years to provide documents. VI. How many plans? A frequent question is how many plans does a plan sponsor actually have. For example, assume a profit sharing plan and a 401(k) plan are contained within the same plan document. They have different eligibility provisions and different trusts. Is this one plan or two? Or, the employer sponsors five different medical benefit programs - an HMO, a self-insured major medical program, a fully insured dental program, a self-insured prescription drug program and a medical flexible spending account. All of the programs have identical claims periods and eligibility rules. Is there one umbrella medical plan or five? There is little authority on this point. IRC Section 414(l) and the underlying regulations provide some guidance and the above mentioned profit sharing 401(k) plan could probably be considered to be one plan under those rules. However, use those rules with caution, PLR 7836001 held that two plans contained within a single plan document and trust agreement were dissimilar enough to be considered two plans for 5500 filing purposes. From the DOL perspective, our informal conversations with the department lead us to conclude that the department is more concerned that all of the appropriate information is reported, than the number of plans it is responsible to track. As a practical matter, the Department seems to focus upon the number of SPDs that the employer issues in determining the number of plans. If this is the decision point, sponsors wishing to minimize the number of reports they must file must use caution in how they customize the plan summary. 59-27
McGladrey & Pullen, LLP – Rebecca J. Miller
A. DOL Advisory Opinion 2003-17 deals with a number of unrelated employers all working on the clean up of a plutonium production facility. The employers created the Hanford Employee Welfare Trust. The Trust provides medical, dental, vision, life insurance, AD&D and disability benefits. Based upon the very specific facts, it was concluded that this might be a single plan. VII. Consequences of ERISA Plan Status A. Subject to ERISA 1. Reporting and Disclosure 2. Funding 3. Accrual 4. Vesting 5. Fiduciary Conduct, etc. a. ERISA requires diversification, "unless under the circumstances it is clearly prudent not to do so...” ERISA Section 404(a)(1)(C). The following case doesn’t really belong in this outline, but it was interesting so I wanted to raise it somewhere. Metzler v. Graham, CA 5, No. 95-11129, 5/13/1997 discusses a situation where the court concluded that it was prudent not to diversify. B. Uniform Bankruptcy Protection - Even after the Supreme Court decision in Patterson v. Shumate, 504 U.S. 753, this area continues to generate a lot of interest. 1. IRAs are not eligible for the ERISA protection. See Rousey v Jacoway, 8th Cir. No. 02-3505, 10/20/03. a. But may have state law protection. See, for example, Clark v. Lindquist, D. Minn., No. 03-4542 ADM, 11/12/03. 2. But, funds withdrawn from an ERISA plan but still subject to the 60-day rollover period are exempt. See Wolff v. Gibson, D. MD., No. DKC 2003-2465, 11/5/03. 3. IRS lien can’t be secured, but not extinguished, either. See IRS v. Snyther,9th Cir., No. 02-15618, 9/15/03. 4. See Yates decision above under the definition of a participant. This decision is material for bankruptcy protection. ERISA plan accounts of partners and 100 percent owners will be protected if plan covers non-owner employees. 5. Top-Hat plan participants are treated as unsecured creditors in bankruptcy. See IT Group Inc. v. Bookspan , Bankr. D. Del., No. 02-10118 (MFW, 2/3/04) 6. Bankruptcy protection is not the same as protection from garnishment for past due taxes. See US v. Garcia, D. Kan., No. 96-10049-01-JTM, 11/6/03.
7. A disqualifying action does not void the bankruptcy protection of ERISA. See In re Handel, Bankr. S.D.N.Y., No. 01-40758 (RDD) 11/17/03.
59-28
McGladrey & Pullen, LLP – Rebecca J. Miller
C. Federal Law for problem resolution - Limits recoveries, damages, reimbursement of legal fees, etc. 1. Simple confusion over where to take the case. See for example, Whalen v. Wyman-Gordon Co. DC Mass, No. 95-40206-NMG, 9/26/97. The case deals with a conflict between the beneficiary designation and the passage of property through a will. 2. Contract dispute for unpaid severance (golden parachute benefits) became a federal matter due to ERISA jurisdiction. See Anthony Cvelbar v. CBI Illinois, USCA, 7th Cir. No. 96-1669. See also Noyes v. DecisionOne Corp., E.D. Pa., No. 02CV7249, 4/22/03. 3. ERISA pre-empted an employee’s state law claim against a TPA that was allegedly negligent in posting erroneous early retirement benefits to its web site. Kollman v. Hewitt Associates LLC, E.D. Pa., No. 032944, 10/15/03. 4. Reasonableness of professional fees? Rutledge v. Seyfarth, Shaw, Fairwhether & Geraldson, 201 F3d 1212 (9th Cir. 2000). This case held that the determination of whether fees where reasonable in the case of a service provider to the plan and receiving payment from an ERISA plan was an ERISA matter and not that of state law. 5. Trial by jury: ERISA generally does not authorize or prohibit a jury trial. The general sense seems to be that jury trials are inappropriate. See Katsaros v. Cody, 744 F.2d 270, 278 (2d Cir. 1984), cert. denied, 469 U.S. 1072, 5 EBC 2753 (1984) - no right to jury trial in action alleging breach of fiduciary duty; Cox v. Keystone Carbon Co., 861 F.2d 390 (3d Cir.1988), cert. denied, 498 U.S. 811 (1990) discharged employee not entitled to jury trial for action brought under ERISA Sect 502(a)(3) to enjoin any act or practice or to obtain other equitable relief; Pane v. RCA Corp., 868 F.2d 631 (3d Cir. 1989) no right to jury trial for benefits claim; Sullivan v. LTV Aerospace and Defense Co., 20 EBC 1161 (2d Cir. 1996) - former employees terminated as a result of downsizing are not entitled to jury trial in ERISA Section 502(a)(1)(B) action to recover severance benefits under plan since such proceedings are equitable in nature. But see Adams v. Cyprus Amax Mineral Co., 20 EBC 2575 (D. Colo. 1997) former employees are entitled to jury trial in their action under ERISA's civil enforcement Section 502(a)(1)(B) seeking recovery of severance benefits, where claim for severance benefits under ERISA plan is comparable to breach of contract claim, which involves legal issue, and where relief sought is money damages, which is generally legal remedy, and monetary amounts are determinable in traditional action at law by jury, since constitutional right to jury attaches because claims are legal, rather than equitable, in nature. For an interesting spin on this issue see the BNA Pension & Benefits Report of June 13, 2000 where it was reported that the U.S. District court for the Middle District of North Carolina will authorize a jury trial in Vencor Hospitals East, Inc. v Smithfield Foods, M.D. N.C. No. 1:99CV00753, 5/23/2000. There is no reported case on this matter as of April 2004. 6. Only four parties are granted standing to sue under ERISA – participants, beneficiaries, fiduciaries and the Department of Labor. a. Participant can include a former employee who has a right or may be expected to have a right to benefits. See Shawley v. Bethlehem Steel Corp., 989 F.2d 652 (3d Cir. 1993) and McBride v. PLM International, Inc., 179 F.3d 737, 23 EBC 1455 (9th Cir. 1999). b. An unenrolled, eligible employee has no standing to sue. See Partsinevelos v. Tropical Machines, Inc., 2d Cir., No. 03-7211, 10/29/03 – unpublished opinion reported in the BNA Pension Reporter.
59-29
McGladrey & Pullen, LLP – Rebecca J. Miller
c.
A former participant who has received a lump-sum distribution, but believes that more is due under the plan continues to have standing to sue. See O’Connell v. Kenney, D. Conn. , No. 3:03CV0845 (DJS) 12/15/03. Likewise the spouse of such participant may also qualify as a beneficiary and have right to sue.
7. Administrative Remedies: ERISA Section 503 requires that all plan participants exhaust administrative remedies prior to going to the Courts or other agencies for relief. Plans are to provide participants with a clear listing of these administrative remedies. Specifically: a. Provide[s] adequate notice in writing to any participant or beneficiary whose claim for benefits under the plan has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by the participant, b. Afford[s] a reasonable opportunity to any participant whose claim for benefits has been denied for a full and fair review by the appropriate named fiduciary of the decision denying the claim. Regulations were issued in 2001 regarding this matter. Note that many suits have been lost before they were even begun over the failure to first exhaust these internal remedies. Specifically the regulations provide in DOL Regs. 2560.503-1(1) that if a plan fails to establish or follow claims procedures consistent with the requirements of the final regulations, a claimant will be deemed to have exhausted the administrative remedies available under the plan and shall be entitled to pursue any available remedies under ERISA Section 502(a) on the basis that the plan failed to provide a reasonable claims procedure that would yield a decision on the merits of the claim. In other words – pass GO, collect $200. These regulations first apply after January 1, 2002 and deserve detailed study. 8. Attorney Fees: a. Recovery: In Ghorbani v. Pacific Gas & Electric Co. Group Life Insurance, N.D. Calif. No. C-993306-VRW, 6/16/2000, the court ruled that the attorneys representing the non-prevailing parties and working on a contingent fee basis could be held liable for the prevailing party’s attorney fees. The following is excerpted from the case: In Corder v Howard Johnson & Co., 53 F3d 225 (9th Cir 1994), the court stated: "We have frequently expressed our disfavor of awards of attorney's fees against individual ERISA plaintiffs who seek pension benefits to which they believe they are entitled." Id at 231. More recently, however, in reviewing a district court's attorney fee award, the court wrote: "We first disabuse the district court of the suggestion that we favor one side or the other in ERISA fee cases. The statute is clear on its face--the playing field is level." Estate of Shockley v Alyeska Pipeline Service Co., 130 F3d 403, 408 (9th Cir 1997). Despite the conflicting attitudes expressed by the panels in these cases, both adhered to application of the five-factor test set forth in Hummell v S.E. Rykoff & Co., 634 F2d 446, 45253 (9th Cir 1980). Under Hummell, the court's discretion to award attorney fees under ERISA is guided by: 1) the degree of the opposing party's culpability or bad faith; 2) the ability of the opposing party to satisfy an award of fees;
59-30
McGladrey & Pullen, LLP – Rebecca J. Miller
(3) whether an award of fees against the opposing party would deter others from acting in similar circumstances; (4) whether the party requesting fees sought to benefit all participants and beneficiaries of an ERISA plan or to resolve a significant legal question regarding ERISA and (5) the relative merits of the parties' positions. In cases predating Shockley, several courts noted that these equitable factors "very frequently suggest that attorney's fees should not be charged against ERISA plaintiffs." Id; Credit Managers Ass'n v Kennesaw Life & Acc. Ins., 25 F3d 743, 748 (9th Cir 1994); Tingey v PixleyRichards West, Inc., 958 F2d 908, 909 (9th Cir 1992) (citations omitted). An individual plaintiff's ability to pay, for example, will often be limited. Perhaps most significantly, courts have expressed concern that fee awards against individual plaintiffs may frustrate the purpose of ERISA by chilling meritorious suits. See Corder, 53 F3d at 232. Often this point arises in discussion of the third Hummell factor, i.e., "whether an award of fees against the opposing party would deter others from acting in similar circumstances." Courts have interpreted this factor to require a focus not only on groundless lawsuits or defense of clear ERISA violations, but on the tendency of an award to deter "marginal but meritorious [claims]." Id. Whether or not this is a proper reading of the third Hummell factor, it is reasonable to conclude that imposing liability on plan participants for unsuccessful ERISA lawsuits could erect a barrier to enforcement of the statute. Given this, it would seem that the "level playing field" metaphor of Shockley is problematic. b. ERISA Section 502(g)(1) allows the Court to award in its discretion reasonable attorney’s fees and costs to either party. See the five factors cited above. A losing party may be relieved of this cost if they were substantially justified in their claim. See for example, Kidd v. H&B Marine, Inc. 932 F2d 347, 349 or 14 EBC 1379, 5th Cir. BUT, many Courts do not award fees to defendant plans or employers. See Van Boxel v. Journal Co. Employees’ Pension Trust, 8366 F2d 1048, 7th Cir. 1987 or Tesch v. General Motors Corp. 937 F.2d 36=59, 7th Cir. 1991. c. ERISA Section 502(g)(2)(D) requires a court to award attorneys’ fees to a prevailing plan in litigation concerning multi-employer plans.
d. A plan participant whose employer had to sue her to recover an overpayment of a distribution was required to pay the employer’s fees. See Primary Carenet of Texas V. Scott, W.D. Texas, No. SA99-CA-0427 OG, 2/26/2001. The court noted that it was undisputed that the participant retained amounts to which she was not entitled. This seems to reflect that the above considerations will go both ways. 9. Limitation on Damages a. State common law claims based on the wrongful denial of benefits will almost always be preempted by ERISA, as benefit claims by their very nature fall directly under ERISA Section 502(a)(1)(B) (which provides a plaintiff with a cause of action under ERISA to sue for benefits due him under an employee benefit plan). This means that benefit providers will nearly always seek the ERISA preemption since tort claims frequently result in substantial monetary awards, whereas ERISA damages are limited to the promised employee benefit. For example, see Geissal v. Moore Medical Corp., E.D. Mo., No. 4:94 CV 1263, DDN 3/29/2001. In this case, the estate of the participant sued for damages associated with the death of the plan
59-31
McGladrey & Pullen, LLP – Rebecca J. Miller
participant. In a sympathetic ruling, the Court said that this would be effectively compensatory damages that are not permissible under ERISA. The court stated that it recognized that its ruling “...essentially leaves plaintiff without relief against the [] plan. ...[S]everal courts have noted this problem and the gap in ERISA remedies as a result of the preemption of state remedies.” b. Limits on recovery: Although ERISA Section 502(d) provides that employee benefit plans are entities which "may sue or be sued" and be liable for monetary judgments, most circuits have held that plans may not seek redress under ERISA Section 502(a). c. Ancillary issues, however, are consistently held to be outside of ERISA. i. ii. Hence, medical malpractice claims have been held not to be preempted. See DeGenova v. Ansel, 555 A.2d 147, 150 (Pa. Super. 1988) As have state tort claims for professional negligence against accountants, actuaries and other professionals. See Framingham Union Hosp., Inc. v. The Travelers Ins. Co., 721 F. Supp. 1478, 1490 (D. Mass. 1989) (malpractice claim against accountant not preempted); Colteryahn Dairy, Inc. v. Western Pa. Teamsters and Employers Pension Fund, 785 F. Supp. 536 (W.D. Pa. 1992) (negligence claim against accountants and actuaries not preempted, but professional negligence claim against trustees and trust fund preempted).
iii. In addition, legal malpractice claims against attorneys representing ERISA plans are not preempted. See Custer v. Sweeney, 20 EBC 1569 (4th Cir. 1996). d. In Jackson v. Fortis Benefits Insurance Co., 8th Cir. No 00-3120, 4/6/2001 the Court held that participants and beneficiaries were not entitled to pre-judgment interest on their delayed benefits. See ERISA Section 502(a)(3)(B). D. State Preemption (ERISA Section 514(a) Contract law disputes are frequently open to more flexible settlements. May eliminate many state mandated benefits. 1. Preemption does not extend outside of the United States. See Maurais v. Snyyder, 2000 U.S. Dist. LEXIS 13818 (E.D. Penn., Sept 14, 2000). Here a Canadian physician sued an insurance company through a state law claim of implied contract and negligent misrepresentation. These were related to medical care that he had provided in Canada to an American citizen covered by the plan. 2. Non-ERISA benefit offered by an ERISA plan is still covered by the State court system. See Kemp v. International Business Machines, Corp., CA 11, No. 95-9223, 4/8/1997. 3. Insurance Clause continues to be subject to interpretation. The ERISA preemption provision does not extend to State insurance laws. ERISA Section 514(b)(2). a. One issue is just what is an insured plan. For example, see American Medical Security, Inc. v. Bartlett, CA 4, No. 96-1376, 4/11/1997. Here the appeals court found that ERISA preempted the state’s regulation insurance. The employers in the case had purchased stop-loss coverage at $25,000 per person. The State argued that these were effectively fully-insured plans with just a very high deductible and, thus, subject to mandated benefits. (Note, this is a very simplified summary of the actual arguments in the case.)
59-32
McGladrey & Pullen, LLP – Rebecca J. Miller
b. A dispute over a severance pay program, funded with insurance was not moved from state court to Federal courts. The argument was a fraudulent inducement, not an error in benefits. See Towne, M.D. v. National Life of Vermont, Inc.; D. Vt., No. 2:00-CV-305, 12/20/2000. c. A law firm’s claim against an insurer for allegedly misrepresenting the contract was preempted. See Krooth & Altman v. North American Life Assurance Co., D.D.C., No. 98-1399, 2/22/2001. As noted earlier, this case includes the interesting twist of partners being considered beneficiaries for ERISA, even if they are not participants or employees.
d. On a similar line see, Bridges v. Principal Life Insurance Co., M.D. Ala., No. 00-A-1725-N, 2/27/2001. e. ERISA does not preempt a case stemming from the employer’s failure to establish a plan on behalf of the employee. Russell v. FPS Fire Protection Systems, Inc., D.N.H., No.03-095-JD, 11/25/03. f. ERISA does not preempt a claim that an accounting firm fraudulently sold a sole proprietor a VEBA. DiMartine v. Somerset Financial Services, LLC, S.D. Ind., No. IUP03:cv-0672-JDT-WTL. Unpublished 12/16/03.
4. Concept of an arrangement that relates to an ERISA plan continues to be discussed. Cases have dealt with the right of states to charge premium taxes from health plans, whether the provision of care is related to the plan or a state malpractice action, etc. a. For example, the Visconti v. U.S. HealthCare , US Dist LEXIS 7772 (ED Pa 1994) deals with a situation where claim of negligence against an HMO was preempted. b. See also Pryzbowksi v. U.S. HealthCare, Inc. 3d Cir. No. 99-5920, 3/27/2001. c. In this regard, realize that the DOL considers this an unfortunate by-product and regularly files Amicus curiae in these situations supporting the position that the preemption should not apply on maters regarding the delivery of healthcare.
d. In contrast see, Pappas v. Asbel, Pa., No. J-158-200, 4/3/2001, New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Inc. Co. 5/1/1995, 19 EBC 1137 and Pegram v. Herdich, 6/13/2000, 24 EBC 1641. e. In a situation where the Court really stretched to get an answer it liked, see Duchesne-Baker v. Extendicare Health Services, Inc., E.D. La., No. 02-0590 Section E/5, 10/9/03. An error made by an insurance company/administrator was deemed to have been made in its insurance business, rather than in its role as the administrator to the plan......? f. The Supreme Court is expected to issue an opinion on the question of ERISA preemption of HMO decisions. HMOs are particularly troubling in this regard as the entity that provides the care is the plan. Thus, questions of care are blended between eligibility and quality. i. The first case was Pegram v. Herdich, 530 U.S 211, 120 S. Ct 2143. This case set a standard for decisions that mixed eligibility and treatment and that the basic treatment decisions were not fiduciary in nature. The result being that the participant’s only recourse was for the benefit, not damages. Kentucky Association of Health Plans Inc. v. Miller, 123 S.Ct. 1471, 4/08/03.
ii.
59-33
McGladrey & Pullen, LLP – Rebecca J. Miller
iii. Watch for Supreme Court holding in Aetna Health Inc. v. Davila and CIGNA HealthCare of Texas, Inc. v. Calad. Many commentators believe that the Court is going to hold that ERISA does preempt these cases. That will leave many participants in the unhappy situation of not being able to collect damages for what might otherwise been classified as malpractice. If true, expect some Congressional action. 5. Stock option plan not preempted, since it is not an ERISA plan. See Raskin v. Cynet Inc., S.D. Texas, No. H-00-2356, 2/16/2001. 6. UBIT tax is preempted by ERISA, at least in one state.... See In re McKinsey Master Retirement Plan Trust, N.Y. Tax. App. Trib., No. 817551, 5/8/03. 7. Run of the mill negligence claims are not preempted. See Savasta and Co. v. Gerosa, U.S. 03-523 cert denied 12/08/03. 8. Fraudulent Inducement claim is preempted by ERISA. See Wilson v. Coman, M.D. Ala., No. 03-CV-21, 08/20/03. This case deals with a participant’s claim that she was manipulated into purchasing a different insurance policy by the salesman’s failure to explain the details on surrender charges. The deal breaker in this case is that the participant was seeking compensatory relief, not just benefits under the terms of the plan. E. Statute of Limitations on claims under the plan. ERISA ‘s sole statutory provision on the statute of limitations is found in ERISA Section 413 and relates to a fiduciary breach. Generally, participant claims for benefits become subject to the statute of limitations in their state. This may be the statute for a contract law violation or lost wages. See for example: 1. Sandberg v. KPMG Peat Marwick, LLP, 111 F3d (2nd Cir. 1997). Here the decision was subjected to the state worker’s compensation law that had a 2-year limitation period. 2. Note that this confusion can have inadvertent consequences. If a case is taken in the wrong court, it may become too late to bring it in the right court. However, see Kulinski v. Medtronic Bio-Medicus, Inc., CA 8, No. 95-3682, 5/2/97.) Here the Court concluded that the Minnesota “saving’s statute” permits plaintiffs to begin a new action within one year after the reversal of a previously favorable judgment. Very specific facts, but highlights the issue. See also, Bogle v. Phillips Petroleum Co., 24 F3d 758, 5th Cir. 1994. This case went from State court to Federal court and back to State court before final resolution. 3. In Imperial Plan, Inc. v. U.S., 74 AFTR 2d 94-6157 (C.D. Cal. 1994), aff'd, 95 F.3d 25, 20 EBC 1839 (9th Cir. 1996), a federal district court ruled that a claim for refund of Section 4975 excise taxes must be filed within three years of filing Form 5500, not Form 5330. 4. Where the jurisdiction is transferred, the statute of limitations of the original jurisdiction may still apply. See In re: United Mine Workers of America Employee Benefit Plan Litigation, US Dist LEXIS 7491, DDC 1994 and Eckstein V. Balcor Film Investors, 8 F3d 1121, 7th Cir. 1993. 5. Sometimes a participant can do an end run around the rules. In Spann v. Chicago Physicians II, P.C., N.D. Ill, No. 99 C 5871, 2/25/2000 24 EBC 1878, Dr. Spann had been short-changed on her disability pay. She missed the timeframe for a normal benefit claim. However, she brought suit against the
59-34
McGladrey & Pullen, LLP – Rebecca J. Miller
fiduciaries on the basis that their failure to properly correspond with the insurer of the disability program was a fiduciary breach. Thus, she has potentially gained access to the longer ERISA statute of limitations. There is more to come on this case. 6. One extreme example of the impact of the state’s statute of limitations was illustrated in 2000. The Supreme Court refused to review a case that applied a one-year statute of limitations to bar employee claims under ERISA. See Inter-Modal Rail Employees Ass’n v. Burlington Northern and Santa Fe Railway Co., U.S. No. 99-1704, cert denied 6/26/2000. The following is excerpted from this case: Appellants contend that the statute of limitations should be equitably tolled because, at the time they were discharged by SFTS, the uncertainty in the law prevented them from knowing what statute of limitations would apply to a §510 claim in California. This argument fails. Not only has it been deemed equitable to apply a statute of limitations retroactively when there was no clear precedent, see, footnote 5, supra, but, "[a]s a general rule, absent some wrongdoing on the part of a defendant, a plaintiff's ignorance of his cause of action ... does not prevent the running of the limitations period." Garabedian v. Skochko, 283 Cal. Rptr. 802, 804 (Ct. App. 1991), quoted in Hinton v. Pacific Enters., 5 F.3d 391, 397 (9th Cir. 1993). The case goes on to list the various California statutes are respective periods for making a claim under those statutes. The submission to the Supreme Court as summarized in the BNA Pension & Benefit Reporter on July 11, 2000, page 1657 highlights the problems presented in this area. As follows: 1) Is a lower court, when importing an analogous state statute of limitation in a case under Section 510 of ERISA, free to disregard “duty” imposed in Reed v. United Transportation Union, 488 U.S. 319 (1989), “to assure that the importation of state law will not frustrate or interfere with the implementation of national policies”? (2) May a lower court apply a one-year statute of limitation to Section 510 cases in one state after holding that applying a one-year statute in another state would interfere with federal policy that underlies ERISA? (3) Do wide disparities between circuit courts of appeal and among states within their respective ambits, and unpredictable results of their efforts to analogize limitations for Section 510 cases, create such confusion and uncertainty as to constitute interference with the implementation of Section 510 or frustration of underlying congressional purpose? (4) Should the U.S. Supreme Court resolve the difficulties of analogizing under Section 510 by the lower courts by analogizing to other provisions of ERISA and adopting their three-year limitation periods to create a uniform national statute of limitation for Section 510? (5) In claims involving multiemployer benefit plans, should a uniform federal statute of limitation for Section 510 cases be analogized from ERISA's three-year period under Section 4301 established for multiemployer plan litigation to fulfill the purpose of ERISA to regulate multiemployer plans throughout interstate commerce? (6) Does failure to plead the statute of limitations defense until after remand from the Supreme Court constitute a waiver of defense or bring doctrine of equitable estoppel into play?
59-35
McGladrey & Pullen, LLP – Rebecca J. Miller
(7) May a court import and apply a newly derived state rule of limitation long after the case has begun without also applying that state's rules of waiver and equitable estoppel? 7. In Wineinger v. United Healthcare Insurance Co. D. Neb. No. 8:99CV141, 3/13/2001 the employer attempted to set its own statute of limitations in writing within the plan agreement. The Court stated that this was impermissible. The participants still failed, as they had not brought suit within the 5-year period for Nebraska claims under a written contract. The sponsor attempted to argue that the case should come under a special 3-year statute for group insurance benefits. Apparently, this statute would have applied if the case had dealt with a benefits claim rather than a change in the co-payment amounts. This emphasizes the frustration in this area. This case has interesting application in the context of participant directed retirement plans that regularly provide for specific correction time frames in the event of errors in interpreting or applying the participant direction. 8. Three-year statute applied where participants were aware of a divestiture in 1987 and did not file claim until 2002. See Oeshsner v. Connell Limited Partnership, S.D.N.Y., No. 02 Civ. 6638 (CM) 09/16/03. 9. A subjective clause in a plan document gave a participant 7 years to file a claim. See Harris v. The Epoch Group L.C., 8th Cir., No. 03-2006, 2/6/04. Missouri law in this case granted the participant 10 years. The plan provided for three years or “such longer period as required by various state laws.” 10. In Forrest v. Vital Earth Resources, Texas Ct. App. No. 06-02-00177-CV 10/28/03, the employee was able to assert that the statute of limitations set in the plan document overruled the shorter state statute.
59-36
McGladrey & Pullen, LLP – Rebecca J. Miller
Field Assistance Bulletin 2004-1
April 7, 2004 Memorandum for: Virginia C. Smith Director of Enforcement, Regional Directors From: Robert J. Doyle Director of Regulations and Interpretations Subject: Health Saving Accounts
Issue : Whether Health Savings Accounts established in connection with employment-based group health plans constitute "employee welfare benefit plans" for purposes of Title I of ERISA? Background
Section 3(1) of the Employee Retirement Income Security Act of 1974 (ERISA) defines the term "employee welfare benefit plan" in relevant part to mean "any plan, fund, or program . . . established or maintained by an employer . . . 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 . . . ." Section 1201 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173 (the Medicare Modernization Act), added section 223 to the Internal Revenue Code (Code) to permit eligible individuals to establish Health Savings Accounts (HSAs).(1) In general, HSAs are established to receive tax-favored contributions by or on behalf of eligible individuals, and amounts in an HSA may be accumulated over the years or distributed on a tax-free basis to pay or reimburse "qualified medical expenses." In order to establish an HSA, an eligible individual, among other conditions, must be covered under a High Deductible Health Plan (HDHP).(2) Contributions to an HSA established by an eligible individual who is an employee may be made by the employee, the employee's employer or both in a given year.(3) Amounts in an HSA may be rolled over to another HSA.(4) If an employer makes contributions to HSAs, the employer must make available a comparable contribution on behalf of all eligible employees with comparable coverage during the same period.(5) However, employers that make contributions to an employee's HSA are not responsible for determining whether HSAs are used for qualified medical expenses or for investing or managing amounts contributed to an employee's HSA.(6) It is our understanding that a number of employers that currently sponsor ERISA-covered group health plans may wish to add an HDHP option and offer programs designed to enable employees to establish HSAs to pay for medical expenses not covered by the HDHP. Questions have been raised about whether, and under what circumstances, HSAs established in connection with employment-based programs would constitute "employee welfare benefit plans" within the meaning of section 3(1) of ERISA.
Analysis
Congress, in enacting the Medicare Modernization Act, recognized that HSAs would be established in conjunction with employment-based health plans and specifically provided for employer contributions. However, neither the Medicare Modernization Act nor section 223 of the Code specifically address the application of Title I of ERISA to HSAs. Based on our review of Title I, and taking into account the provisions
59-37
of the Code as amended by the Medicare Modernization Act, we believe that HSAs generally will not constitute employee welfare benefit plans established or maintained by an employer where employer involvement with the HSA is limited, whether or not the employee's HDHP is sponsored by an employer or obtained as individual coverage. Specifically, HSAs meeting the conditions of the safe harbor for group or group-type insurance programs at 29 C.F.R. § 2510.3-1(j)(1)-(4) would not be employee welfare benefit plans within the meaning of section 3(1) of ERISA.(7) Moreover, although contributions or payment of group insurance premiums by an employer would be a significant consideration in determining whether a group or group-type insurance arrangement is an employee welfare benefit plan under section 3(1), such contributions or payments are not necessarily significant in analyzing the status of HSAs under ERISA. As noted above, HSAs are personal health care savings vehicles rather than a form of group health insurance. For example, funds deposited in an HSA generally may not be used to pay health insurance premiums,(8) and the beneficiaries of the account have sole control and are exclusively responsible for expending the funds in compliance with the requirements of the Code. Because of these differences, we regard court precedent on the significance of employer contributions to group or group-type insurance arrangements as inapposite to HSAs. In the group health insurance context, the employer, whether by choosing an insurance policy or creating a self-funded program, typically establishes the type of benefits provided, the conditions for their receipt, and the manner in which claims will be adjudicated. In the context of HSAs, however, the employer may be doing little more than contributing funds to an account controlled solely by the employee. Accordingly, we would not find that employer contributions to HSAs give rise to an ERISA-covered plan where the establishment of the HSAs is completely voluntary on the part of the employees and the employer does not: (i) limit the ability of eligible individuals to move their funds to another HSA beyond restrictions imposed by the Code; (ii) impose conditions on utilization of HSA funds beyond those permitted under the Code; (iii) make or influence the investment decisions with respect to funds contributed to an HSA; (iv) represent that the HSAs are an employee welfare benefit plan established or maintained by the employer; or (v) receive any payment or compensation in connection with an HSA. The mere fact that an employer imposes terms and conditions on contributions that would be required to satisfy tax requirements under the Code or limits the forwarding of contributions through its payroll system to a single HSA provider (or permits only a limited number of HSA providers to advertise or market their HSA products in the workplace) would not affect the above conclusions regarding HSAs funded with employer or employee contributions, unless the employer or the HSA provider restricts the ability of the employee to move funds to another HSA beyond those restrictions imposed by the Code.
Conclusion
HSAs generally will not constitute "employee welfare benefit plans" for purposes of the provisions of Title I of ERISA. Employer contributions to the HSA of an eligible individual will not result in Title I coverage where, as discussed above, employer involvement with the HSA is limited. Finding that an HSA established by an employee is not covered by ERISA does not, however, affect whether an HDHP sponsored by the employer is itself a group health plan subject to Title I. In fact, unless otherwise exempt from Title I (e.g., governmental plans, church plans) employer-sponsored HDHPs will be employee welfare benefit plans within the meaning of ERISA section 3(1) subject to Title I. Questions concerning this matter may be directed to Suzanne Adelman, Division of Coverage, Reporting and Disclosure at 202-693-8523.
59-38
Footnotes
1. The U.S. Department of the Treasury and the Internal Revenue Service (IRS), which have interpretive and regulatory authority over HSAs under section 223 of the Code, issued general guidance concerning HSAs on December 22, 2003, in I.R.S. Notice 2004-2, and issued additional guidance on March 30, 2004, in I.R.S. Notice 2004-23, I.R.S. Notice 2004-25, Revenue Ruling 2004-38, and Revenue Procedure 2004-22. The Treasury/IRS guidance is available on the Internet at www.treas.gov/offices/public-affairs/hsa. See I.R.S. Notice 2004-2, Q&A Nos. 1 and 2. Id. Q&A No. 11. Id. Q&A No. 23. Id. Q&A No. 32. Id. Q&A No. 30. Regulation section 2510.3-1(j) excludes from Title I coverage certain group or group-type insurance programs. In general, such programs are excluded from coverage where there are no employer contributions, employee participation is voluntary, the employer does not endorse the program, and the employer receives no consideration in connection with the program, other than reasonable compensation for administrative services actually rendered in connection with payroll deductions. See also 29 C.F.R. § 2509.99-1 relating to payroll deduction IRAs. Although the Medicare Modernization Act excludes health insurance from the qualified medical expenses that may be paid from an HSA, there are exceptions for the payment of COBRA premiums, certain insurance for individuals over 65, long-term care insurance premiums and health insurance during periods of unemployment. Code section 223(d)(2).
2. 3. 4. 5. 6. 7.
8.
59-39