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ERISA & Employee Benefits Law
South Texas College of Law Houston
Smith, Stephen

Employee Benefits (ERISA) Law

Fall 2013 – Honorable Stephen Smith

I. ERISA Exclusion of Certain Plans [ERISA § 4(b)]

a. Governmental Plan

i. A plan established or maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing.

ii. any plan to which the Railroad Retirement Act of 1935, or 1937 applies

iii. A plan which is established and maintained by an Indian tribal government, a subdivision of an Indian tribal, or an agency or instrumentality of either, and all of the participants of which are employees of such entity substantially all of whose services as such an employee are in the performance of essential governmental functions but not in the performance of commercial activities (whether or not an essential government function)

b. Church Plan

i. A plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches which is exempt from tax under section 501 of title 26.

c. Plans Maintained to Comply w/ Certain Laws.

i. A plan that is maintained solely for the purpose of complying with applicable workmen’s compensation laws or unemployment compensation or disability insurance laws.

d. Excess Benefit Plans

i. A plan maintained by an employer solely for the purpose of providing benefits in for certain employees in excess of the limitations on contributions and benefits imposed by section 415 of title 26 on plans to which that section applies without regard to whether the plan is funded.

II. What is a “Plan” within the meaning of ERISA law?

a. 4 different approaches

i. Literal

1. Within the exact wording in the statute.

ii. Dillingham ( Factor approach)

1. Intended benefits

2. Intended beneficiaries

3. A source of financing

4. A procedure to apply for and collect benefits

a. Problem with Dillingham – If a source of funding cannot be identified, then either the program is not a plan or it is a plan in violation of ERISA.

b. Dillingham test assumes in violation of ERISA.

iii. Mass v. Morash (Policy Approach)

1. Payroll practices, including the payment of vacation benefits “out of an Employer’s general assets rather than from a trust fund, are not ee welfare benefit plans w/in the meaning of ERISA.

a. ERISA created because Congress’ primary concern was with the mismanagement of funds accumulated to finance the employee’s benefits and the failure to pay employee’s benefits from accumulated funds.

2. Ordinary vacation benefits do not depend on contingencies outside of the employee’s control.

iv. Fort Halifax Approach

1. ERISA preempts laws relating to plans—i.e., benefits whose provision by nature requires an ongoing administrative program to meet the ER’s obligation

a. The requirement of a one-time lump-sum pmt triggered by a single event req’s no administrative scheme whatsoever to meet the ER’s obligation. The ER assumes no responsibility to pay benefits on a regular basis, and thus faces no periodic demands on its assets that create a need for financial coordination and control.

b. Generally Plan Must be in Writing

i. ERISA plans must be “established and maintained pursuant to a written instrument.” ERISA § 402(a)(1).

1. Operates like a statute of frauds

ii. Courts have been reluctant to allow plan participants to prove oral modifications to written plans

1. Courts have sometimes been willing to infer the existence of a plan despite the failure of the ER to reduce it to writing as required by ERISA.

c. Some courts have indeed ruled that single ppt plans are covered by ERISA.

d. Musmeci v. Schwegmann

i. Case Facts: Schwegmann had a grocery voucher program which required 20 years of service, 60 years old and hold supervisory position for 1 year. Vouchers were good for 30 days @ Schwegmanns stores only ; only retiree/spouse could use them. Schwegmann went out of business and stopped program.

ii. Court Held: Under the IRC, gifts in exchange for services are income. The vouchers more in nature of gift for services.

1. Criticism: “Gross Income” under IRC includes pension.

III. Employees vs Employers

a. Employee — The term “employee” means any individual employed by an employer. ERISA § 3(6)

i. Supreme Court uses common law test for employee (the hiring party’s right to control the manner and the means by which the product is accomplished).

ii. ERISA does not apply where employer only prsn covered in a plan

1. One or more employees have to be covered other than the business owner and his or her spouse.

b. Employer — The term “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.” ERISA § 3(5).

i. Generally non-employers cannot sponsor an ERISA plan

1. Associations sponsored plans fall into this category.

ii. Plan sponsor – Party that pays out the assets for the plans. Party that provides the plan. Usually employer.


I. Defined Benefits vs Defined Contribution

a. Differences in Defined Benefit vs Defined Contribution

i. DB specifies the output at the end of retirement ( promises amount of retirement)

ii. DC specified the input ( No promise you will reach a certain amount upon retirement)

b. Defined Benefits

i. Characteristics of Defined Benefits Plan

1. Income at retirement

a. Provides income on a deferred basis after retirement not before.

2. Periodic Payments

a. Generally paid periodically rather than a lump sum, Usually monthly

3. Funded Collectively

a. Funded collectively ( funded by trust, not in individual plans)

i. DB Funding requirements are formula based. Requires actuarial calculations.

4. Burden on Employer

a. The burden and risk of funding is on the employer.

i. If the funds in the trust are inadequate to pay promised benefits, the ER is obligated to make up the shortfall.

ii. Benefits of DB Plans

1. Helps to facilitate the departure of your older workers.

2. Helps to attract employees

c. Defined Contributions (listen to audio)

i. Individual accounts

ii. Contributions are made monthly (usually)

1. Can be profit-sharing

2. Money Purchase ( annual percentage of salary goes into account)

iii. Burden on Employee

1. Investment risk and reward shifts from employer to the employee.

II. Vesting, Accrual and Forfeitu

led to treat employee’s trust account balances as nonforfeitable.


i. Employer violated IRC §411(d)(3) and the trust was not a qualified trust under IRC 401(a).

ii. Termination 66.66% of the workforce is generally sufficient to find a partial termination.

iii. The absence of good faith or predatory efforts does not preclude a finding of partial termination.

ii. Vertical Partial Termination

1. Excluding previously covered plan participants, whether by dismissing them or by amending the plan.

a. There is a rebuttable presumption that a partial termination occurred if >= 20 percent of participants are fired.

iii. Horizontal Partial Termination

1. A partial termination will be deemed to occur if a DB plan ceases or decreases “future benefit accruals” and as a result a potential reversion to the employer maintaining the plan is created or increased.

iv. Prohibiting discrimination in favor of HCEs

1. IRCS 411(d)(1) proscribes “pattern of abuse” cases , such as terminating employees to keep their pension rights from vesting, when that pattern would tend to discriminate in favor of the highly compensated employees.

b. Anti-discrimination Rule

i. It is unlawful “to discharge, fine, suspend. Expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan [or under Title 1 of ERISA] or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan [or Title 1] (ERISA §510)

1. See McGann v. H&H Music Co.

a. Amendment to welfare plan decreasing AIDS benefits did not violate ERISA §510.

ii. Discriminatory Intent

1. Gavalik v. Continental Can Co.

a. In deciding which plant to close, the employer aimed to avoid triggering future vesting by laying off those employees who had not yet become eligible and retaining those employees who already had vested benefits.


1. This action violated ERISA §510 because the “desire to defeat pension eligibility” was a determinative factor in the company’s action.

2. Nemeth v. Clark Equipment Co.

a. When employer decided which plant to close, one factor to management was that pension costs would have run $6M more at one plant than at the other.


1. Employer did not violate ERISA §510 because “At most, pension costs amounted to 20% of the total difference in cost between two plans.

2. Was not the determinative factor, as employer would have made the decision to close the plant even if it had ignored the cost of the pension plan altogether