G. ERISA Concerns

The Employee Retirement Income Security Act of l974 (ERISA) set up minimum standards for benefit plans, the vesting of benefits, and for communication to plan participants and their beneficiaries. It covers benefits an employee receives while on the payroll (welfare benefits) and benefits to be received upon retirement. The act covers six basic areas including communications (e.g., what must be disclosed to employees, how it must be disclosed and what reports must be filed with the federal government); eligibility (e.g., an employee's right to participate in a retirement benefit plan); vesting (e.g., rules regarding when and to what extent retirement benefits must be made non-forfeitable); funding (e.g., what employers must pay into a retirement plan to meet its normal costs and to amortize past service liabilities); fiduciary responsibility (e.g., how the investment of funds must be handled and the responsibilities of the plan administrators to oversee the plan and plan benefits as a fiduciary); and plan termin- ation insurance to protect the payment of vested benefits.

Virtually all private employers are covered by ERISA in one form or another. For example, ERISA problems range from any plan, fund or program which provides medical, surgical or hospital care benefits, to retirement income or the deferral of income after retirement or termination (such as severance), to the handling of deferred compensation plans such as stock bonus and money purchase plans. The following rules discuss concerns you must be aware of to protect your company.

Communications To Employees

ERISA provides that all plan participants are entitled to:

• Examine without charge all plan documents, insurance con- tracts and copies of documents filed by the plan with the U.S. Department of Labor, such as detailed annual reports and plan descriptions;
• Obtain copies of all plan documents and other plan information upon written request to the plan administrator, but the employer or administrator may impose a reasonable charge to cover the cost of the copies;
• Receive a summary of each plan's annual financial report or summary annual report;
• Obtain a statement at least once a year at no cost telling the employee whether he/she has a right to receive a benefit at normal retirement age under the retirement plans and, if so, what benefit would be paid at normal retirement age if the employee stops working under the retirement plans now. If there is no current benefit, the statement must tell the employee how many more years must be worked to earn the right to a benefit.

When an employee requests materials from a plan and does not receive them within 30 days, he/she may file a lawsuit in federal court. In such a case, the court may require the plan administrator to provide the materials and pay a penalty up to $100 a day until they are received, unless the materials were not sent because of reasons beyond the administrator's control.

Counsel Comment #48: Most employers summarize vari- ous responsibilities in written communications to employees, such as statements in company handbooks. This practice is recommended to ensure that companies adequately fulfill their responsibility of communicating ERISA rights to employees. Make sure the summary accurately depicts essential elements of the plan, because statements in a plan summary are usually binding. If such statements conflict with the plan itself, there is ample case law suggest- ing that the summary shall govern. In one case, a court ruled that "It is of no effect to publish and distribute a plan sum- mary booklet designed to simplify and explain a voluminous and complex document and then proclaim that any inconsist- encies will be governed only by the actual plan."

TIP: Here's what federal ERISA law says about plan summaries: "A summary description must be written in a manner calculated to be understood by the average plan parti- cipant sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of their rights and obligations under the plan."

Responsibilities Of Plan Administrators

Plan administrators are considered fiduciaries with discretionary responsibility to act fairly. No one, including the employer, union or administrator, may fire or recommend the firing of a plan participant or beneficiary for seeking to obtain a benefit or exercise his/her rights under ERISA. If a claim for a benefit is denied in whole or in part, the employee must receive a written explanation of the reason for the denial and the individual must also have the right for the plan administrator to review and reconsider the claim. If an individual is discriminated against or has a claim for benefits which is denied or ignored, in whole or in part, a lawsuit may be filed in either state or federal court. If plan fiduciaries misuse a plan's money, or discrim- inate against an individual for asserting rights, the individual may seek assistance from the U.S. Department of Labor or file a lawsuit in federal court. The court may impose court costs and legal fees on the employer.

Plan administrators have discretion to construe the terms and effect of a plan, determine eligibility, authorize all disbursements, compute the amount of benefits, and to perform any such other duties as required by the plan. Thus, for example, if there is no contractual or statutory entitlement for workers to receive surplus funds, and such a surplus was not created by employee contributions, then the decision of the administrators not to distribute surplus funds to employees will typically be upheld.

Problems Creating, Administering And Terminating Severance Plans

Severance plans, providing for compensation to employees in the event of separation or termination from employment, are covered under ERISA as an employee welfare benefit plan. Many lawsuits alleging violation of ERISA rights have recently been brought in situations where a division of a company with a large severance policy was sold and the division's employees terminated but immediately employed by the acquiring company with far less severance benefits. The newly hired employees were only retained for a short period and then fired.

Do the affected employees have rights under ERISA and may they collect the larger severance benefits from the previous employer? Typically, and as long as the employees were reemployed by the successor and not immediately subject to unemployment, employers have prevailed in such lawsuits.

In a severance context, courts often inquire whether the benefits were intended as a form of unemployment compensation (in which case immediate re-employment makes them unnecessary), or as a reward for past service (in which case immediate re-employment may not preclude receipt of benefits). The major factors courts look at when determining whether employers have ERISA obligations to pay severance include:

1. The employer's purpose in granting the benefit, determined in part from the employer's plan terms and past practice;
2. Consistent application of the plan (i.e., has the employer consistently granted or denied severance benefits to employees who suffered no period of unemployment?);
3. Industry practice;
4. Employer compliance with procedural requirements; and
5. Whether the decision-maker benefited from the denial of benefits. If so, the decision is analyzed closely.

 

TIP: When workers are laid off, issues of severance and other post-termination benefits must always be scrutinized to avoid potential ERISA violations. As a business grows, informal pay policies are frequently relied upon by terminated workers as an economic expectation and contract right. When the business is sold, a buyer may view such payments as discre- tionary and gratuitous. This thinking differs from the view of terminated workers who consider such benefits guaranteed.

Counsel Comment #49: Smart companies draft formal severance rules forbidding the payment of excessive sever- ance and limiting the amount of severance to be paid if a company is sold. Currently, employers retain wide discretion in administering, modifying, and terminating severance plans. Reserving the right in writing to modify or terminate a severance policy at any time with or without notice may protect your company in this area, especially if language is conspicuously displayed in a company handbook and period- ically disseminated to workers in a memo.

 

Standards Of Review In Granting And Disallowing Claims

Employee benefits law is quite complex. New cases are continually being decided which impact your company's plans and practices and evaluating the effect of these developments on your health and benefit plans is critical. When an individual claim is asserted, consider the following items before making a decision:

• Identify the specific benefits claimed.
• Identify the source of the right claimed (e.g., a written company plan, an informal promise or an ERISA right?).
• Is there a legal obligation to fulfill the claim?
• Did the company breach that obligation by refusing to fulfill the promise?
• If so, what are the potential consequences to the company?
• If not, how much will it potentially cost to defend a lawsuit and what other damages may possibly ensue?
• Are there any justifying legal arguments to defend the company's claim?
• Will settling the claim create a damaging precedent?
• Are there overriding moral concerns which support a settlement?
• Is there a statute of limitations defense?
• Will the possibility of failing to settle the case informally create the likelihood that other similarly situated employees act in concert once they learn about the lawsuit?

Obligations Owed To Departing Employees

New questions are constantly arising with respect to retiree health care benefits and successor benefits when a person leaves a company to work in a new job. An employer's obligation to provide post- retirement health benefits typically turns on whether those benefits are actually vested at the time of retirement. When workers change jobs, it is often unclear whether the old or new employer is obligated to provide insurance to cover a pre-existing ailment. Which employer's plan provides primary insurance and which provides secondary insurance after the first pays off? What about workers who are not sure they have a pre-existing condition but still want to retain coverageif the new plan doesn't address a condition the old plan covered, can the worker continue on the old plan? These and other ERISA-related questions can only be answered after a thorough review by competent labor counsel and analysis of the particular facts of the matter.

Pension Benefit Concerns

To safeguard pension benefits, ERISA mandates that assets in a beneficiary's pension be virtually "untouchable." Fiduciaries in charge of administering all plans must diversify investments to minimize risks of large losses, cannot make secret profits, must act in good faith and exercise prudence and diligence, cannot deal with plan assets for their own account, and generally must act with the highest degree of skill, loyalty and care in the performance of their duties.

Complex problems frequently arise involving the effects of bankruptcy, domestic relations, criminal and creditor rights and the forfeiture of pension assets. In one case, for example, the court ruled that a retiree's landlord-creditor could garnish his pension money since the pension benefits had been paid to the employee. The court noted the distinction that ERISA's anti-garnishment protection ends when pension benefits are actually paid to an employee and that there was nothing to indicate that Congress intended to provide pension beneficiaries with a shield from legitimate claims made by creditors who provide shelter or food. (Note: The tribunal pointed out, however, that Social Security benefits are exempt from legal process under a section of the Social Security Act.)

TIP: Absent specific statutory directive, ERISA and its policies usually preserve pension funds from all types of external interference. However, the legality of forfeiture or alienation of pension benefits can only be answered by experienced labor or benefits counsel on a case by case basis.

Waiver Of Pension Benefits

One older applicant was informed by management that if he wanted a job he would have to forego participation in the company's pension plan. He sued and the court ruled that excluding him from the company pension plan did not violate ERISA.

Counsel Comment #50: If you wish to exclude a particular employee from receiving certain pension benefits, you may be able to do so. However, always consult counsel before imple- menting such a plan. Prepare a written comprehensive waiver confirming the employee's voluntary agreement to waive his/her claim to such benefits, and be sure the employee signs such a document in front of witnesses for additional protection.