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By: Bernard G. Peter, Esq.
Kubasiak, Fylstra, Thorpe & Rotunno, P.C.
Chicago, Illinois

INTRODUCTION

As the Employee Retirement Income Security Act of 1974 (ERISA) is about to turn 40 on September 2, 2014 we take a little look at how ERISA, which forever changed the landscape for employers who sponsor retirement plans (other than governmental plans), came into existence.  Also, we review some important  employee benefit plan issues.

HISTORY OF ENACTMENT OF EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED, (ERISA)

  • President John F. Kennedy created the President’s Committee on Corporate Pension Plans in 1961.
  • Major impetus for what became ERISA occurred in 1963 when Studebaker Corporation closed its plant.
    •  3,600 employees age 60 and older received their full pension.
    • Remaining 6,900 employees received 15% of their pension or no pension.
  • Senator Jacob K. Javits proposed legislation in 1967 to address the funding, vesting, reporting and disclosure issues identified by the Presidential Commission.
    •  This bill was opposed by business groups and labor unions.
  • On September 12, 1972 NBC broadcasted Pensions: The Broken Promise
    •  Subsequent to the NBC presentation, Congress held a series of public hearings on pension issues.
    • Public support for pension reform grew significantly.
  • ERISA was signed into law by President Gerald Ford on September 2, 1974, Labor Day.
    •  ERISA enacted the funding, vesting, reporting and disclosures provisions contained in the bill of Senator Javits.
    • ERISA created the Pension Benefit Guaranty Corporation (PBGC).
      •  The PBGC guarantees the benefits of participants up to a certain level if a defined benefit plan terminates without sufficient assets.
  • ERISA has been amended many times since October 2, 1974.
  • ERISA was amended September 26, 1980 by the Multiemployer Pension Plan Amendments Act of 1980 to add withdrawal liability rules for employers who withdraw from a multiemployer pension plan.

WHAT IS THE MOST LITIGATED ISSUE UNDER ERISA?

  • Most ERISA litigation involves health and welfare benefit plan claims.
  • In particular, there are many long term disability claims.
  • The reasons for the prevalence of these claims are:
    • A difference of opinion in the interpretation of the facts is more likely in a health and welfare plan claim than in a retirement claim.
    • Good documentation for welfare plan benefits often is lacking.
    • There may only be an insurance contract where there is no clear delegation to an individual or committee to decide claims.
    • Without any clear delegation of the responsibility to review claims, any decision by the plan to deny a claim will be reviewed completely on a “de novo” basis by a court.
    • If the plan contains delegation language, the claim only can be reviewed to determine if the decision of the plan was “arbitrary and capricious”.
  • The way for companies to limit their liability for health and welfare claims is to adopt a wrap -around document.
  • The wrap-around document will incorporate by reference the welfare plan documentation and contain ERISA language which among other things will delegate the responsibility to decide claims to someone; such as, a committee or the Vice President of Human Relations.

CAN YOU HAVE AN ERISA PLAN AND NOT REALIZE IT?

  • If an employer makes an agreement to pay its employees a retirement benefit, the employer arguably has created an ERISA plan and must reduce the agreement to a written document and comply with the participation, vesting and funding rules of ERISA.
  • A plan under which the plan sponsor makes payments directly to plan participants as retiree benefits become due is not permitted under ERISA.
  • The Fifth Circuit Court of Appeals recently held that a bonus plan was a pension benefit plan for purposes of ERISA because the plan permitted participants to defer distributions to termination of employment or beyond.

WHAT IS THE IMPACT ON ERISA RETIREMENT PLANS OF THE U.S. SUPREME COURT DECISION WHICH HELD THAT SECTION 3 OF THE DEFENSE OF MARRIAGE ACT THAT PROHIBITED THE RECOGNITION OF SAME –SEX SPOUSES FOR PURPOSES OF FEDERAL TAX LAW IS UNCONSTITUTIONAL?

  • In view of the Supreme Court decision in United States v. Windsor, the Internal Revenue Service has ruled that a same-sex marriage which occurs in a state that permits the marriage of two individuals of the same sex must be recognized in the state where the same sex couple is domiciled even if that state does not recognize same sex marriage.
  • Under ERISA and the Internal Revenue Code (Code), retirement benefits generally cannot be paid to a participant unless the spouse is the sole beneficiary or the spouse consents to another beneficiary.
  • Effective June 26, 2013, a same sex spouse must be considered to be a “spouse” in any retirement plans which are subject to ERISA.
  • Any retirement plans which define “spouse” in a manner that does not currently cover a same sex spouse; i.e. a legal union between one man and one woman, must be amended by December 31, 2014 to provide that the term “spouse” covers a same sex spouse.

HOW ARE EMPLOYE BENEFIT PLANS IMPACTED BY THE CONTROLLED GROUP RULES? 

  • In administering employee benefit plans, employers need to keep in mind that all employees of all corporations who are members of a controlled group of corporations are treated as employed by a single employer.
  • There are three situations in which a controlled group exists.
    • Parent-Subsidiary controlled group.
    • Brother-Sister Controlled Group.
    • Combined Group.
      • Parent-Subsidiary Controlled Group
        • One or more corporations connected through stock ownership which owns at least 80% of the total combined voting power of all classes of stock entitled to vote or at least 80% of the total value of shares of all classes of stock of each of the corporations, except the common parent corporation.
        • One or more corporations connected through stock ownership where the common parent corporation owns stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote or at least 80% of the total value of shares of all classes of stock of at least one of the other corporations.
      • Brother -Sister Controlled Group.
        • Two or more corporations if 5 or fewer persons who are individuals, estates or trusts own stock  possessing 50% of the total combined voting power of all classes of stock entitled to vote or more than 50% of the total value of shares of all classes of stock of each corporation.
      • Combined Group.
        • Consists of three or more corporations, each of which is a member of a parent-subsidiary controlled group or a brother-sister controlled group and one of which:
          • Is a common parent corporation included in a group of corporations which is parent-subsidiary controlled group and also
          • Is included in a group of corporations which is a brother-sister controlled group.

HOW DO YOU TERMINATE AN ERISA PLAN AND WHAT IS A PARTIAL PLAN TERMINATION AND THE IMPACT OF A PARTIAL PLAN TERMINATION?  

  • The following steps must be followed in order to terminate an ERISA Plan.  If the plan is a welfare benefit plan, some of these steps are not needed.
  • Plan termination process:
    • Prepare a Board of Director Resolution to terminate the plan.
    • For retirement plans, prepare a Plan amendment to bring the plan up to date with current legislation and IRS and Department of Labor (DOL) regulations and to set forth the date when the plan is terminated and all benefits will end.
    • Notify plan participants that the plan will be terminated.  In the case of defined benefit plans, there are a series of very specifically timed notices which must be sent to plan participants.
    • For defined benefit plans, a termination filing must be made with the Pension Benefit Guaranty Corporation (PBGC) and one should be made with the IRS as well.  For defined contribution plans, a filing with the IRS for a determination letter on termination is optional.
    • Any providers working with the plan should be notified.
    • All plan benefits must be distributed to participants and all plan assets must be cleared out of the plan so that the plan has an account balance of $0.00.
    • A final Annual Report (Form 5500) must be filed with the DOL.
    • If the plan is a defined benefit plan, a final filing must be made with the PBGC.

Partial Termination:

  • Under IRS rules and court decisions, there is a rebuttable presumption that a partial termination of a retirement plan has occurred if there is reduction in plan participants of at least 20% for reasons other than death, disability or retirement on or after normal retirement age during a plan year or during corporate action for a period which extends over a period of time longer than a year.
  • If a partial termination occurs, all participants who are affected by the partial plan termination must be 100% vested if they are not already 100% vested.  For defined benefit plans there is an additional requirement that the benefits of affected participants are 100% vested to the extent that those benefits are funded; i.e. even if there is a partial plan termination if all plan benefits are not 100% funded there is no employer liability

CONCLUSION

In the forty years since the enactment of ERISA there have numerous revisions of ERISA.  There has been a transition from most employers offering a defined benefit plan to their employees to the present day situation where a Code Section 401(k) plan is the most prevalent plan sponsored by employers.  Under a 401(k) plan employees elect to defer a portion of their salary into the plan and in most cases the employer will match the elective deferrals up to a percentage which normally is between 4% and 6% of the compensation of the employee.  The one thing that has not changed over the past forty years is that in the administration of employee benefit plans, there are many issues to deal with under ERISA, the Code and now under the Affordable Care Act.  The questions and answers above touch on a few of these issues.  The more important point to keep in mind is that there must be an internal person who has been delegated the responsibility by the employer/plan sponsor to oversee the administration of the employee benefit plans of the organization and, if that person does not have employee benefits experience, he or she needs to be given the authority obtain outside assistance.  The IRS and DOL have substantial enforcement powers under ERISA so that any employer who sponsors employee benefit plans runs a major risk of serious administrative and financial consequences if someone with employee benefits expertise does not oversee the administration of the plans of the employer.

Bernard G. Peter is a Shareholder with Kubasiak, Fylstra, Thorpe and Rotunno, P.C.   He is an Employee Benefits/ERISA lawyer who advises clients on a broad range of retirement and health and welfare plan issues and executive compensation matters as well as the interaction of employee benefits and employment law matters.

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