Federal Law > Managing Employees > Employee Benefit Plans and ERISA

Employee Benefit Plans and ERISA

It has been said that employer payments of salary and wages create a basic standard of living for workers. Indirect compensation or benefits are said to protect that standard of living. This chapter addresses some common employee benefit plans and the general application of the Employment Retirement Income Security Act (ERISA) to those benefit plans. Because most experts agree that ERISA is a "massive undertaking" this chapter cannot provide any comprehensive study of the statute. Nonetheless, it is hoped that this brief overview will provide some guidance for employers who may have general benefit questions.

There are essentially five (5) primary types of income protection which are typically offered by group benefit plans. Normally, employers will consider providing medical expense benefits, replacement for disability income, payments for survivors, income continuation after involuntary termination, and replacement for retirement income. Under ERISA, benefits are normally divided into two essential categories: Employee welfare benefit plans and pension plans. The extent of regulation under ERISA for each type of plan varies significantly.

Under ERISA, the law demands that welfare benefit plans inform the employee of the provision of benefits to provide the employee with a fair opportunity to make decisions concerning the benefits. ERISA regulation of pension plans also addresses information for beneficiaries, eligibility for participation, how and when benefits may be forfeited, how the plans are to be funded, and the obligations of plan managers.

Employer responsibilities under ERISA. Employer responsibilities for compliance with ERISA are extensive. Further, duties differ depending upon whether the employer has offered a "defined benefit plan" or a " defined contribution plan". A simple explanation of the essential difference between the plans can be noted as follows:

A defined benefit plan has a precisely scheduled amount of benefits which must be paid according to the terms of the plan.

A defined contribution plan does not provide a precise amount of benefit. Rather, it describes that which the employer must contribute. The ultimate amount of benefit payout is left to investment growth, as the investments are fueled by employer contributions.

Under either type of plan, an employer has some fixed responsibilities, including the necessity to file appropriate reports concerning employee benefit levels. In addition, money which is placed in trust by an employer may not generally inure to the employer's benefit. Further, an employer also has a duty not to discriminate against a participant or beneficiary under a plan and the employer may also not attempt to interfere with beneficiary rights under a plan. An employer may not retaliate against any person who participates in an ERISA proceeding. Finally, the employer must also meet minimum funding and contribution requirements.

Protections for employees under ERISA. When an employee becomes vested under a pension plan, the benefit vested must be nonforfeitable regardless of the employee's perceived status, or lack thereof, as a "good" employee. Where distribution of pension assets are to take place, the employee must be given an option to elect a method of payment for those benefits and the payments must begin within a fixed period of time after the election has been made. Should an employee be denied benefits, the employee must receive a written explanation of the denial and an opportunity for a review of the denial.

Fiduciary responsibilities under ERISA. Under ERISA, a fiduciary is essentially a person who engages in the management of an ERISA plan or its assets. A fiduciary under ERISA can be held personally liable for negligent or willfully wrong conduct in violation of the statute.

As a general rule, a fiduciary is to handle the following responsibilities:
1. Insure the performance of an annual audit.

2. See to it that all appropriate ERISA reports are filed with the Secretary of Labor and maintained for six years for examination.

3. Provide each participant or beneficiary with a summary plan description detailing how benefits are earned and lost.

4. Insure that any plan investments are diversified to avoid summar loss.

5. Insure that proper notifications are given should a plan be scheduled for termination.

A fiduciary is required to exercise the level of skill and care applied to a reasonable person under similar circumstances. The fiduciary must insure that he/she has no conflict of interest in managing the plan assets.

ERISA violations. Claims under ERISA may be brought by plan participants or beneficiaries for a number of reasons, including obtaining required notifications and information, securing benefits or rights under the plan, and even seeking equitable relief, costs and attorney's fees for ERISA violations. The remedial portions of the Act are substantial given congressional concern that ERISA protect employees and their families from corrupt or unprofessional management of employee benefit funds.1


Pension plans. A pension plan is a plan which defers income to the termination of employment or beyond thereby providing retirement income. 29 U.S.C. § 1002 (2)(A). The two major types of plans are defined benefit plans and defined contribution plans. Some of the essential terms for each type of plan are described below:

Defined benefit plan. The following are elements of a defined benefit plan:

1. A compensation-based benefit calculation must consider the highest earning years based upon an average from earlier consecutive years not to exceed ten.

2. Eligibility may be conditioned on at least two years of continuing service.

3. Unless tied to social security benefits, age and service may not be utilized to reduce accrued benefits.

4. While a plan may limit the amount of benefits or number of years of service/participation, a plan may not utilize age as a basis for causing accrual to cease or for an accrual rate to decline.

5. After benefits are paid, the surplus in the plan may return to the employer's benefit. Note, however, that a defined benefit plan is distinguishable from a defined contribution plan where the assets of the plan must be distributed to the plan participants.2

Defined contribution plans. In defined contribution plans, the employer contributes a set rate for each hour worked by the covered employee. Ultimately, the amount of pension is determined by annuity payout based upon contributions utilized for an annuity purchase. A couple of the key requirements for a defined contribution plan include the following:

a. Differences for full, part-time, or seasonal employment may occur when calculating years of participation.

b. Again, age is not permitted to cause variations to allocation rates.

However, like defined benefit plans, highly compensated employees are exempt from such protections.3

Welfare benefit plans distinguished from pension plans. Employee welfare benefit plans again differ from regulation of pension plans as they are exempt from accrual, vesting and funding requirements.4 Nonetheless, welfare benefit plans have a number of their own requirements which define their structure under ERISA, including the following:

1. Every employee benefit plan must be established and maintained pursuant to a written agreement. 29 U.S.C. § 1102 (a).

2. The plans must continue beyond the termination of a collective bargaining agreement if the parties have provided for such continuation.5

The nature of the benefits which may be provided under welfare benefit plans are broad, including some of the following types of benefits:

1. Medical, surgical, or hospital care benefits.

2. Vacation benefits.

3. Benefits contingent upon sickness, accident, disability, death, or unemployment.

4. Daycare centers.

5. Apprenticeship or training programs.

6. Prepaid legal services.

7. Scholarship funds.

8. Other types of trust funds, other than pension related benefits, which are established "for the sole and exclusive benefit of the employees". 29 U.S.C. § 186 (c)(5). An example of such benefits could include educational scholarships and severance or termination pay plans.6


Group health plans must provide for an opportunity for continued coverage for certain types of beneficiaries. (See chapter on COBRA.) The continuation of coverage must permit an election period of at least 60 days in duration at a cost of not more than 102% of the actual estimated cost by the employer. Note, however, that COBRA does not impose an obligation to continue a group health plan. Rather, only if the plan continues, a duty arises for an employer to permit an election for continued benefits for employees or their beneficiaries.7 An employer must provide an initial notice that COBRA continuation rights exist by providing for information on continuation rights through an official plan document.8

General plan requirements. Once an employer establishes a benefit plan, written documentation on the plan must clearly name the fiduciary or a procedure for identifying the fiduciaries responsible for the plan. 29 U.S.C. § 1102 (a). The plans themselves must have detailed procedures for satisfying the obligations of ERISA, including procedures for operating and administering the plan, amending the plan and designating procedures for payments to and from the plan. 29 U.S.C. § 1102 (b).

The assets of a plan must be carefully accounted for and held in trust by trustees named by the plan. Employers and their fiduciaries have an obligation to carefully record and report the following information for participants and beneficiaries:

a. The amount of benefits which are rightfully due each employee under the plan.

b. Written reporting to each employee concerning benefits within a specified period of time, upon termination of service, or when the employee has a one year break in service.

c. Adequate information to allow the plan administrator to write and distribute such reports.

Handling plan assets. As a general rule, employers are not permitted access to fund assets except for very limited exceptions because of the following rule: "The assets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan." 29 U.S.C. § 1103 (c)(1).

Extensive litigation has been conducted on the "anti-inurement" provisions of the statute. Employers are cautioned to seek appropriate legal guidance before ever attempting to capitalize on some of the limited exceptions to the anti-inurement provisions of the statute. However, under some circumstances, the statutory bar on benefits inuring to the employer may not prevent recovery of surplus assets.9

Discriminatory or adverse treatment. Unlawful or discriminatory treatment against a person for exercising his/her rights under an employee benefit plan is prohibited. 29 U.S.C. § 1140. As a general rule, an unlawful motivation on the part of the employer must be established and demonstrated.10 Employers are also obligated to meet minimum funding requirements to avoid accumulating a funding deficiency. In multi-employer plans, employers who make up the "control group" have joint and several liability for such contributions. 29 U.S.C. § 1145.

Under the provisions of the statute, an employer is permitted to completely withdraw from a pension plan only under the following circumstances:

a. Employer has permanently ceased to have any obligation to contribute under the plan; or

b. Employer has permanently ceased all covered operations under the plan. 29 U.S.C. § 1383 (a).

An employer should seek legal counsel before attempting to withdraw from a pension plan. An employer may be subject to withdrawal liability in an amount determined under the plan with withdrawal liability starting within 60 days of the date the plan demands payment. 29 U.S.C. § 1399 (b)(1). While an assessed employer may request a review within 90 days of receiving notice of such an assessment, the payments must be made irregardless of the employer's request for a review. 29 U.S.C. § 1399 (b)(2), (c)(2).

Reporting responsibilities. ERISA will protect an employee's rights and interests in a pension or welfare benefit plan regardless of whether the employer has satisfied the administrative and reporting requirements under the Act.11 Among those reporting responsibilities under the statute are the following:

1. Annual audits must be conducted by an independent, qualified public accountant who has been given access to all pertinent records.12

2. Communication with plan participants and beneficiaries must be done in accordance with the statute. Summary plan descriptions, information on modifications and amendments, and information from annual reports must be furnished on a timely basis. Notification procedures must be aggressive and designed to provide notification of pertinent information.13 Communications in summary plans must be adequate to explain the circumstances under which disqualification, ineligibility, or denial or loss of benefits can take place in clear, intelligible language. 29 U.S.C. § 1022 (b).

3. The administrator of the plan must satisfy reporting requirements to the Secretary of Labor. Information including the filing of summary plan descriptions, modifications and changes, the annual report and related documents, must be conveyed to the Secretary of Labor on a timely basis. 29 U.S.C. § 1021 (b), 1024.

4. Materials supporting filed documents must be retained for a period of six years for examination. 29 U.S.C. § 1027.

Pension plan vesting requirements. As previously noted, an employee's rights to accrued pension benefits must be nonforfeitable once the participant reaches retirement age.14 Normally, a sliding scale is used to determine the employee's right to a percentage of the employer's contributions based upon years of service. The longer the employee has been employed and part of the plan, the greater the nonforfeitable right of access to accrued benefits.

Normally, years of service are calculated by crediting the employee's years of work with the employer with some exceptions for "break in service", periods when the employer or employee did not participate or contribute to the plan, and other exceptions.

Allowable reductions in pension benefits. There are several types of payments, unrelated to pension benefits, which could adversely affect the amount of an employee's pension benefit:

1. Worker's Compensation deductions.

2. Deductions for "strike time" engaged in by the employee.

3. Negotiated severance package benefits recognizing the value of vested pension benefits.

4. Social security benefit reduction.

5. Impact of early retirement decisions.

6. Garnishment by third parties.

7. Impact of Medicare benefits.

Plan amendments. ERISA has extensive provisions which prohibit an employer from invoking an amendment to a plan which could negatively affect accrued benefits unless the amendment has been approved by the Secretary of Labor and adequate notice has been given to the participant.15 Any attempt to amend a plan without adequate approval is ineffective. It may not adversely impact the accrued benefits available to a participant or beneficiaries.16
Payment of benefits. As a general rule, payment of benefits must begin within sixty days from the close of the plan year and the latest date the participant attains age 65 or the normal retirement age under the plan, the tenth anniversary of participation, or the date the participant terminates employment. 29 U.S.C. § 1056 (a). When an early retiree attains that age, he/she must be paid normal retirement age benefits. Further, increases in social security cannot affect ongoing benefits or the nonforfeitable benefits of a participant who has been separated from employment.

Final regulations for employee-directed plans. The Department of Labor (DOL) has issued final regulations for employee-directed plans under ERISA. Employees are permitted to utilize their own investment philosophy for their retirement funds under 401(k) plans. Under §404(c) of ERISA, employees can relieve employers and plan administrators of some fiduciary responsibilities concerning investment choices. Still, the employer and the administrator retain fiduciary duties for designing the overall investment program and designating the available investment options for participants.

Under the final DOL regulations, 404(c) plan administrators must provide participants with adequate information to make knowledgeable investment decisions. Information includes description of transaction fees, description of investment instructions, and certain types of prospectus or proxy information. In addition, the final regulations permit the imposition of reasonable restrictions on the frequency of investment directions from employee participants.

The impact of ERISA on employer handling and structuring of employee retirement and welfare benefit plans is substantial. An employer should carefully consult with benefit experts and legal counsel to insure that appropriate decisions are made concerning retirement and welfare benefit plans.

  1. Pension Benefit Guaranty Corp. v. R. A. Gray & Co., 467 U.S. 717, 104 S. Ct. 2709 (1984). See also, 29 U.S.C. § 1001 (a).

  2. Bash v. First Mark Standard Life Insurance Company, 861 F.2d 159, 163 (7th Cir. 1988).

  3. 29 U.S.C. § 1054 (b)(2)(A)(B); 29 U.S.C. § 1054 (b)(1)(H).

  4. 29 U.S.C. § 1051 (1), 1081 (a).

  5. International Union, UAW v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983), cert. den. 465 U.S. 1007 (1984).

  6. Firestone Tire and Rubber Company v. Bruch, 489 U.S. 101, 109 S. Ct. 948 (1989).

  7. Hotel Employees Local 217 v. MHM, Inc., 976 F.2d 805 (2d Cir. 1992).

  8. Meadows v. Cagle's, Inc., 957 F.2d 686 (11th Cir. 1992).

  9. Chait v. Bernstein, 835 F.2d 1017 (3rd Cir. 1987).

  10. Pompano v. Michael Schiavone & Sons, Inc., 680 F.2d 911 (2nd Cir. 1982). See also, Fitzgerald v. Codex Corp., 882 F.2d 586 (1st Cir. 1989) where a former wife sued employer alleging coverage under husband's medical plan and claiming that husband was allegedly discharged on pretext.

  11. Blau v. Del Monte Corp., 748 F.2d 1348, 1352 (9th Cir. 1984), cert den 474 U.S. 865 (1985).

  12. 29 U.S.C. § 1023 (a)(3)(A).

  13. Kaszuk v. Bakery & Confectionary Union & Industry International Pension Fund, 791 F.2d 548 (7th Cir. 1986).

  14. Johnson v. Franco, 727 F.2d 442 (5th Cir. 1984).

  15. 29 U.S.C. § 1082 (c)(8)(C).

  16. Meagher v. International Association of Machinists, 856 F.2d 1418 (9th Cir. 1988), cert den 109 S Ct 1943 (1989).
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