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Employee Benefits
University of Illinois School of Law
Anderson, Sean M.

Employee Benefits
Spring 2009
Ch. 1 – Introduction to Employee Benefits Law
–          Benefits Law – Many issues/areas:
o   Employment law, Family law/divorce (QDRO), Tax law, Estate planning, Health care
o   Retirees: Social Security, Pension plans, Retirement Plans, Health Plans
o   Workers: Retirement Plans, Health Care Plans, Benefit Plans for new hires
–          Themes/Policies/Issues
o   Retirement Planning:
§ Where is the money coming from and why?
§ Is this the best way to set up retirement and health care benefits?
o   Federal Tax Benefits:
§ Encourage ER’s to have retirement plans
§ One of the largest tax expenditures in entire federal budget (health care plans close second)
·         Question: Is this a good idea? Does this make sense? Why do we do this?
o   Yes: Social Security
§ takes burden off of SS (but often works other way – benefits from private plan might go down b/c of what you get from SS but SS will not go down b/c of what you get from private plans)
§ SS never meant to be full-funding for retirement – meant to be safety net for elderly
·         But will not keep many to the standard of living they are used to
·         If not SS, then welfare, Medicare/Medicaid (again on TP’s)
·         Question: Why doing it through the tax code? Why have retirement savings that are employer based? Why not bump up SS with all the money we are saving on tax benefits?
o   Avoids administrative costs – encourages people to save for themselves instead of putting into gov’t program and have gov’t administer
§ But current system – millions of ER’s w/ separate retirement plans – really saving transaction costs?
o   Historical accident
§ Before SS, some ER’s who cared about EE’s starting having retirement plans (competitive)
·         That idea caught on – Slowly Gov’t starting reacting and did things in tax code to encourage this behavior
§ Huge amounts of money at stake – ER’s are paying a lot/Individuals are saving a lot of money – paying a lot in premiums and co-pays
·         Extremely bulky system of regulation and legislation trying to keep them from spinning out of control
·         Questions: Who is paying?
§ Risks:
·         Who is bearing risks? **very important when talking about retirement plans**
o   Someone always bearing the risk when talking about planning for the future
·         Kinds of Risks:
o   That investments aren’t going to perform well (wont keep up w/ inflation, wont keep up with plans for retirement)
o   That company sponsoring plan will go out of business w/o putting enough money in the plan for peoples retirement
–          Employee Retirement Income Security Act of 1974– ERISA – 29 USC §§ 1001-1461
o   Primary federal law that regulates retirement, health care, disability and other welfare benefit plans sponsored by private employers for their employees
§ Governs: how the ER has to administer the benefit plan, what type of information an ER who participates in the plan has to distribute, what you can and can’t write into the benefit plan
o   Relied on common law of trusts, codified, then many amendments and court decisions
§ Statutory law with decisional superstructure
o   Pre-ERISA:
§ Over course of 20th Century, regulation of EE benefits plans has progressed to increasingly complex and comprehensive regulation
·         Before 1921 – few, if any, employee benefit federal or state laws
§ 1935: Congress passed the Social Security Act
·         Old age and survivor benefits
·         Congress’s awareness of need for programs that would contribute to theh retirement income security of the population
§ 1935: Congress passed National Labor Relations Act
·         Provided basic framework for the regulation of relations between organized labor and management – and of collective bargaining
§ 1947: Inland Steel v. NLRB
·         Holding: Pension benefits were a mandatory subject of collective bargaining
§ 1947: Labor Management Relations Act of 1947 (LMRA or Taft-Hartley Act)
·         Sec. 302 – criminal violation for ER to provide anything of value to a representative of employees
·         Employee benefit Plan must be administered by a joint board of trustees with equal representation of management and labor
·         Also required that there be a provision for breaking deadlocks
·         Section 302(c)(5) – established certain principles of fiduciary responsibility for the administration of these plans and the investment of their assets
§ 1958: Welfare and Pension Plans Disclosure Act (WPPDA)
·         Required limited reporting to the US Dept of Labor by private sector plans and disclosure of certain information to their participants
·         Amended in 1962: required bonding of all persons who handled plan assets and provided limited investigatory and enforcement powers for the DOL
§ 1973: comprehensive legislation introduced by Senators Williams and Javits –
·         Formed the basis of what was to become ERISA
·         (Legislative history on p. 6)
o   Primary purpose of bill: protection of individual pension rights;
§ Establish equitable standards of plan administration,
§ mandate minimum standards of plan design with respect to the vesting of plan benefits
§ require minimum standards of fiscal responsibility by requiring the amortization of unfunded liabilities
§ insure the vested portion of unfunded liabilities against the risk of premature plan termination
§ promote a renewed expansion of private retirement plans and increase the number of participants receiving private retirement benefits
o   Major Issues:
§ Vesting – refers to the nonforfeitable right of interest which an employee participant acquires in the pension plan
·         Recommended legislation to make minimum vesting provisions mandatory
§ Funding – refers to the accumulation of sufficient assets in a pension plan to assure the availability of funds for payment of benefits due to the employees as such obligations rise
·         Minimum funding rules – require ER to make contribution to a pension fund, qualified by the IRS, of amounts equal to the pension liabilities currently being created
o   Promise and commitment of a pension plan can only be fulfilled when funds are available to pay the EE participant what is owed to him
§ Fiduciary Responsibility and Disclosure
·         Conduct in fund transactions, degree of responsibility required of the fiduciaries, types of persons who would been deemed pension “fiduciaries” and the standards of accountability
o   ERISA Public Policy Goals – ERISA § 2
–          Internal Revenue Code of 1986 – 26 USC § 1-9833
o   Specific requirements that retirement plans must satisfy to qualify for highly favorable income tax treatment for both the ER who sponsors the plan and the EE who participates in the plan
§ Qualified Plan: retirement plans that satisfy the IRC requirements
Ch. 2 – Plan Operation and Administration
–          Statutory Structure of ERISA
o   Title 1 – Regulatory Scheme (7 Parts)
§ Part 1 – Statutory reporting and disclosure requirements for all employee benefit plans
§ Parts 2 and 3 – minimum participation, vesting, benefit accrual and funding rules applicable to employee pension plans
§ Part 4 – rules that govern fiduciaries of employee benefit plans
§ Part 5 – mechanisms for enforcing requirements of Title I through civil litigation
§ Parts 6 and 7 – special rules applicable to health care plans
o   Title II – IRS
o   Title III – established authority of the DOL and Dept of Treasury to enforce provisions of Title I and II
o   Title IV – addresses underfunding in multiemployer DB plans and abusive practices in the termination of DB plans
–          ERISA’s Regulating Federal Agencies
o   Dept of Labor – Employee Benefits Security Administration
§ Primary jurisdiction over reporting, disclosure, fiduciary responsibility (inc. prohibited transactions) and administration and enforcement under Title I
o   Treasure Department
§ Primary jurisdiction over standards for employee pension plans in Parts 2 and 3 of Title I and independent IRC requirements for qualified plans
o   Pension Benefit Guaranty Corporation
§ Primary jurisdiction over matters in Title IV
–          Types of Plans Subject to ERISA
o   Definitions: ERISA § 3
§ Pension Plan: ERISA § 3(2)
·         Designed to provide retirement income to the employee or results in a deferral of income by the employee until the termination of employment or beyond
§ Welfare Benefit Plan: ERISA § 3(1)
·         Designed to provide other types of benefits to EE, such as health care benefits or benefits in the event of sickness, accident, disability, death or unemployment
§ Severance Pay Plan:
·         Provide payments to former employees when the employer involuntarily terminates the employment
·         DOL Regs – these plans will be a welfare plans – not pension plans – if plan payments are not contingent on the employee’s retirement, and the payments do not exceed twise the employee’s annual salary, and the payments cease within 24 months of termination of employments
o   See DOL Reg. § 2510.3-2(b)
§ Top-Hat Plan:
·         Executive-only plans where high ranking executive of corporation may participate in a plan where the payment of part of the executive’s compensation is deferred until the executive terminates employment
o   Similar to severance pay plan – but if more generous in amount or duration of payments than DOL regs permit – may be classified as pension plan
§ Nonqualified Plans:
·         Do not receive favorable tax treatment like qualified retirement plans that satisfy the requirements of IRC § 401(a)
o   E.g. Top-Hat Plan
o   Distinguishing between Pension and Welfare Benefit Plans
§ Distinction between pension plans and welfare benefit plans
·         Significant b/c Parts 2 and 3 of Title 1 – dealing with participation, vesting, benefit accrual and funding requirements – apply only to pension plans
§ Most plans are single employer
§ Multiemployer Plan: defined ERISA § 3(37)
·         Plan that is sponsored by more than ER pursuant to a collective bargaining agreement
o   Plans for union members
o   Primarily regulated under Taft-Hartley/LMRA
o   Administered by a board of trustees comprised of an equal number of representatives from management and labor
·         Common in construction, trucking, industrial sectors
·         Not just one single company with a plan – instead, pooled arrangement with several companies who all pay fund for EE’s
·         Generate much litigation – plan sues ER for not making required contributions
§ Multiple Employer Plan:
·         More than one unrelated employer maintains a plan but ER’s do not maintain the plan pursuant to a collective bargaining agreement
·         A.k.a. Multiple Employer Welfare Benefit Plans – MEWA’s
o   Plans Excluded from Coverage under ERISA
§ Important b/c if not a plan, not covered by ERISA and participants will not have any claims or remedies under ERISA
·         If plan is regulated under Title I of ERISA, a potential plaintiff is limited to the claims and remedies available under ERISA
o   See ERISA § 502(a)
·         Potential state law claims and remedies, including punitive damages, are preempted by federal law
o   See ERISA § 514
·         Not being a plan may sometimes be good – might prefer to be under State law
o   If plan is not subject to ERISA, state law claims and remedies may be asserted
·         If feel wronged under plan – have to know if you are covered under ERISA and if you can sue under ERISA
§ ERISA § 4(b) – Types of Plans Expressly Excluded from coverage under Title I – no

yees in, or reasonably expected to be in, currently covered employment; or
·         Former employees who “have a reasonable expectation of returning to covered employment” or who have a “colorable claim” to vested benefits
§ To establish that he or she “may become eligible” for benefits, claimant muts have a colorable claim that :
·         1. He or she will prevail in a suit for benefits, or that
·         2. Eligibility requirements will be fulfilled in the future.
§ Does not include a former employee who has neither a reasonable expectation of returning to covered employment nor a colorable claim to vested benefits
§ Employee – ERISA § 3(7)
·         “Any individual employed by an employer”
o   Is circular and explains nothinhg
·         AC definition (rejected by SC): ERISA plaintiff can qualify as an “employee” simply by showing:
o   1. He had a reasonable expectation that he would receive pension benefits
o   2. That he relied on this expectation; and
o   3. That he lacked the economic bargaining power to contract out of [benefit plan] forfeiture provisions
·         Common-law Agency Doctrine:
o   SC adopts a common-law test for determining who qualifies as an “employee” under ERISA
§ When Congress has used term “employee” without defining it, the SC concludes that congress intended it to describe the conventional master-servant relationship under agency law
o   In determining whether a hired party is an employee under the general common law of agency, consider:
§ The hiriging party’s right to control he manner and means by which the product is accomplished
§ Skill required
§ Source of instrumentalities and tools
§ Location of the work
§ Duration of the relationship between the parties
§ Whether the hiring party has the right to assign additional projects tot eh hired party
§ The extend of the hired party’s discretion over when and how long to work
§ The method of payment
§ The hired party’s role in hiring and paying assistants
§ Whether the work is part of the regular business of the hiring party
§ Whether the hiring party is in the business
§ The provision of employee benefits
§ The tax treatment of the hired party
o   All of the incidents of the relationship must be assessed and weighed with no one factor being decided
o   Voluntary Waiver
§ ERISA does not prohibit an individual from waiving his or her right to participate in an employee benefit plan
·         To be valid, the waiver must be “knowing and voluntary”
·         A court will consider the surrounding circumstances of the waiver, including:
o   Individuals education, sophistication, experience; clarity of the waiver agreement, amount of time given to study the waiver
o   Independent Contractors – Microsoft
§ Microsoft used to enter into individualized contracts with free lance computer programmers
–          Plan Documents and the Written Instrument Rule
o   ERISA § 402 – Formal Requirements for an Employee Benefit Plan
§ §402(a) – Plan Document or Written Instrument Rule
·         a plan must be established and maintained pursuant to a written instrument that provides for one or more named fiduciaries
o   every covered retirement and welfare employee benefit plan must be in writing
o   so that every employee can determine exactly what his rights and obligations are under the plan
o   so that the employee can know who is responsible for operating the plan
·         a plan document must provide for “named fiduciaries”
o   have authority to control and manage the plan operations and administration
§ may be person whose name actually appears in the document
§ may be a person who holds an office specified in the document (i.e. co pres)
§ may be a person who is identified by the employer or union under a procedure set out in the document
§ may be identified as a committee or as the company that sponsors the plan
·         Donovan – federal courts will recognize the existence of an employee benefit plan that is not established in writing if the plan has characteristics of an employee benefit plan
o   But most ER’s prefer to have it in writing
o   Writing precludes claims by plan participants that oral statements by a plan fiduciary have “amended” the terms of the plan
·         Prototype plans
o   Used by many employers as the written instrument establishing pension plan
o   2 documents:
§ 1. Prototype plan document
·         Contains boilerplate language required by Code Section 401(a) for a qualified retirement plan
§ 2. Employers adoption agreement
·         Contains the ER’s individual choices concerning various optional design features for qualified retirement plans
o   See Appendix A