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Employee Benefit Plans
Temple University School of Law
Litvin, Robert

Employee Benefits

Professor Litvin – Fall 2014

What are they: Non-wage compensation to the employee

Ex. Vacation time, health insurance, dental, vision, life insurance, disability (LTD and STD), retirement, childcare, family medical leave, leave of absence, discounts, travel reimbursements, company vehicle, severance, training / education, stock options, stocks, deferred compensation, fringe (coffee and donuts), prepaid legal services

Deal with just IRC and ERISA

– But, not all employee benefit programs are subject to ERISA

– Usually, when ERISA applies, state and local law is out of the picture and the employee is fucked

– Not enough attorneys representing employees (ERISA is very employer friendly)

– ERISA pension plans v. welfare plans

Qualified ‘Retirement’ Plans: Sec. 401

(a) Trust created forming stock bonus, pension or profit sharing plan of employer for the

exclusive benefit of his employees or their beneficiaries if contributions are made to the

trust by such employer or employees, or both

– Subject to 410 participation standards and 410(b) non-discrim. rules in favor of HCEs

Benefits behind such plans, When employer puts retirement funds in trust:

– It gets an immediate ded.

– Employee gets no immediate tax (no recognition when put aside)

– Earnings on the funds grow tax deferred

2 Categories of Retirement Plans

Defined Benefit Plans: Defines what the benefit is but doesn’t state how it goes in, typically

defined as a monthly benefit, Ex. 1.6% x Yrs of Service x Final Average Compensation

– Generally employer funded, actuaries predict how much with certain assumptions –

inflation, life expectancy and cost of living figures

– Insured by the Fed. Gov’t; If an employer sponsors such, it must pay premiums to

the PBGC (pension benefit guaranty corp.)

– Policy behind is to allow retirees have enough funds for life after work

Defined Contribution Plans: Basic 401k or Profit-Sharing plan; like a glorified bank account,

whatever’s in the account is the benefit; DC plans are not insured (disappearing)

– Employer matching contributions to a certain point, defined by plan document (define how it gets in)

– Generally yield more today for employees since so many people jump from employer

to employer, doing so yields smaller DB plan funds

1002 ERISA definitions: Does a benefit plan fall into the definitions listed in stat.

(1) Employee welfare benefit plan or welfare plan means a plan or fund maintained by employer

or employee organization where employer purchases insurance or otherwise (A) medical

care benefits in event of sickness, accident, disability, death

(2) Employee pension benefit plan or pension plan means a plan maintained by employer to

provide retirement income to employees or deferral of income by for periods up to and

beyond termination

(3) Plan defined: Dillingham factors – plan has intended benefits, intended beneficiaries, source

of financing and procedure to apply for and collect benefits

ERISA applies only to private sector employees, NOT gov’t employees

For a plan to be ERISA, depends on nature of the benefit and one of the beneficiaries must be an

employee (defeated by solely partners or sole proprietor; can’t be gov’t)

Severance: Burden under ERISA is incredibly high (but state law remedies are very attainable if

ERISA doesn’t apply); Fort Halifax – Maine law where any employer opens a plant,

they must pay terminated workers one week severance for every year worked, one-time

payment, issue whether the severance program was state mandated employee benefit

plan, S.Ct. held benefit package only constitutes plan under ERISA if it requires ongoing

administrative program to meet employer’s obligation; one-time payment did not meet it

ERISA requires a written Plan Document

– Requires a Summary Plan Description for the employees (summarize key points)

– Requires a claims procedure set forth (how to file)

– Must identify a main fiduciary

– Reporting and disclosure requirements (file info with gov’t – form 5,500)

Microsoft (1997): Group of freelancers for Microsoft signed contracts as independent contractors, Microsoft didn’t allow them into a benefit plan since they weren’t employees (did so for FICA and payroll tax payments – withhold employee amount and employer has to match it), IRS disagreed, Some contractors were hired but others were kept on as contractors through a temp agency, these workers filed suit for failure to participate in the SPP and ESPP (401k and stock plan), Participation depends on who’s eligible within the plan document, They were eligible if they were employees on the American payroll, The SPP was an ERISA plan since it required retirement benefits, The ES

rage is anywhere from 2% – 8%, HCE average can’t be greater than 2% more the Non’s; If Non HCE is less than 2% the HCE average can’t be greater than double the Non’s; If Non HCE’s are above 8% than the HCE’s can’t be above 1.25 times the Nons

– Ex. 2 HCE’s and 8 Non’s – HCE 1 is 10%, HCE 2 is 4%, Non 1 & 2 are 10%, Non 3 is 6%, Non 4 is 4%, Non 5 is 2%, Non 6, 7, 8 are 0%; Average HCE is 7% and Average Non’s is 4%, Fails since HCE is greater than 2% more than Non’s

– Correcting ADP Failures are determined by plan document: most common remedy is to distribute back to HCE’s enough of their elected deferrals to bring their percentage down; Take HCEs who’s deferred the highest percentage amount and put some money back until meet the test, money put back is considered I then (specialized rules); Less common for employer to put in money to Non HCE’s to get their percentage up (QNEC); Extremely rare but works that ACP test funds can be taken and put into ADP test (must be in plan doc.); Some employers will have automatic contributions at certain percentages

– 401(m) Test: ACP is nearly identical, but look to employer matching instead of deferral, otherwise same percentages

– Testing must be done for calendar yr. companies btw Dec. 31 and March 15

414(q) HCE: Either classified through ownership or through compensation

– Employee with 5% or more ownership of the Employer co. is an HCE, if in the current yr. or previous yr. [can’t look at direct ownership, attribution rules apply: family, parent / subsidiary, trust, stock options, voting rights, profit interests (really depends on the entity)]

– Employee who is paid $115k or more from the Employer in the previous yr., look-back (was amount for 2013, 2014) ($115k is indexed by IRS, use the index number of yr. testing)

– HCE defined 414(q), Compensation defined 415(c) as anything that went on W-2

– §401(a)(17) Excess compensation (anything above $260k) shall not be taken into consideration under DC or DB plan