Frequently Asked Questions and Answers About ERISA Basics for In-House Counsel

  • August 1, 2003

Excerpts from Q's & A's Prepared by Jackson Lewis for the American Corporate Counsel Association Labor & Employment Law Committee. Full text is available to ACCA members on the ACCA Labor & Employment Law Committee website.

ER1. In a nutshell, what does ERISA coverage mean?

Arrangements which are subject to ERISA (see ER2) must meet the following requirements:

1. Reporting and disclosure requirements. These include:

  • Annual reports (Form 5500)
  • Summary plan descriptions
  • Participant benefit information and notices

2. Fiduciary requirements.

Requirements applying to establishment of plan – in writing; provide procedure for allocating responsibilities for plan operation and administration; provide plan amendment procedure; specify basis for making payments to and from the plan.

  • Plan assets required to be held in trust
  • Fiduciary duties and responsibilities
  • Prohibited transactions involving use of plan assets

3. Enforcement of ERISA rights.

  • Claims for benefits
  • Actions to enforce ERISA requirements and ERISA plan terms
  • Penalties
  • Prohibition of interference with protected ERISA rights
  • Preemption of state laws

Arrangements which provide health benefits must meet the following additional requirements:

  • Continuation of group health coverage (COBRA)
  • HIPAA rights – special enrollment rights; pre-existing condition rules; nondiscrimination based on health factors

Arrangements which provide retirement benefits (other than certain "top-hat" plans – see ER3) must meet the following additional requirements:

1. Participation, vesting, and funding

  • Minimum participation standards
  • Minimum vesting standards
  • Benefit accrual requirements
  • Form and payment of benefits requirements
  • Minimum funding standards (defined benefit plans only)

2. Defined benefit plan termination insurance

3. Termination of single employer defined benefit plans

4. Withdrawal liability from multiemployer pension plans

ER2. What arrangements are covered by ERISA?

ERISA applies to two types of plans – "Employee Welfare Benefit Plans" and "Employee Pension Benefit Plans."

An "Employee Welfare Benefit Plan" [ERISA § 3(1); DOL Reg. § 2510.3-1] is

Any plan, fund, or program established or maintained by an employer or by an employee organization, or by both, which provides any of the following benefits, through insurance or otherwise

  • health insurance
  • group life insurance
  • long-term disability income
  • severance pay
  • funded vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services; and
  • any benefit described in section 302(c) of the Labor Management Relations Act (other than pensions on retirement or death)

"Payroll practices" (see ER3) and certain group or group-type insurance programs with minimal employer or employee organization involvement are not included.

An "Employee Pension Benefit Plan" [ERISA § 3(2); DOL Reg. § 2530.3-2] is

Any plan, fund, or program established or maintained by an employer or by an employee organization, or by both, which

  • provides retirement income to employees, OR
  • results in a deferral of income by employees for periods extending to the termination of covered employment or beyond

Employee Pension Benefit Plans include:

  • Profit-sharing retirement plans
  • Stock bonus plans
  • Money purchase plans
  • 401(k) plans
  • Employee stock ownership plans
  • Defined benefit retirement plans

ER3. Can an unwritten plan, practice, or informal arrangement be subject to ERISA?

If a "plan, fund or program" provides the type of benefits described in E2, it will be covered by ERISA even if it is an unwritten plan or practice or an informal arrangement.

Under the test most commonly applied by the courts, a "plan, fund or program" will be established for purposes of ERISA if, from the surrounding circumstances, a reasonable person can ascertain (1) the intended benefits, (2) a class of beneficiaries, (3) the source of financing, and (4) procedures for receiving benefits.

The courts have held that an employer cannot escape ERISA coverage by maintaining an informal or unwritten plan or merely by failing to comply with ERISA's disclosure and reporting requirements. Thus, the courts have found that the existence of an ERISA plan can be established from written guidelines set forth in internal policy statements or corporate manuals or by descriptions in employee handbooks.

ER5. Are non-qualified and incentive stock option plans and stock purchase plans covered by ERISA?

ERISA does not apply to payments made by an employer to some or all of its employees as bonuses for work performed, unless such payments are systematically deferred to the termination of covered employment or beyond, or so as to provide retirement income to employees.

Accordingly, stock option plans and stock purchase plans are not covered by ERISA.

ER6. Are annual bonus and long-term incentive plans covered by ERISA?

ERISA does not apply to payments made by an employer to some or all of its employees as bonuses for work performed, unless such payments are systematically deferred to the termination of covered employment or beyond, or so as to provide retirement income to employees.

Accordingly, annual bonus and long-term incentive plans usually will not be covered by ERISA. On the other hand, if the plan requires the deferral of a significant portion of an employee's bonus until at least the time the employee reaches retirement age or until termination of employment it may be subject to ERISA.

ER8. Is an arrangement under which executives can defer compensation for a specified period covered by ERISA?

ERISA applies to any plan which (1) provides retirement income to employees, OR (2) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond.

In general, a deferral arrangement which is in the nature of a bonus or incentive plan and makes no reference to retirement or to the deferral of income to termination of employment will not be subject to ERISA. However, the DOL takes the position that an arrangement which defers compensation for a specified period may be subject to ERISA if the facts and circumstances indicate that the arrangement:

  • is administered in a manner that has the effect of providing retirement income to employees,
  • results in a deferral of income by employees extending to termination of covered employment or beyond, or
  • if communications to participants suggest that the arrangement is established or maintained for the purpose of providing retirement income or to defer income to the termination of covered employment or beyond.

ER10. What peculiar issues do severance plans raise?

The DOL and the courts uniformly have held that severance pay benefits are covered by ERISA if the severance benefits are provided pursuant to a "plan, fund or program" – severance plans are not considered to be "payroll practices." A severance pay practice may be covered by ERISA even if it is not set out in writing or in a formal plan document (see ER3).

The Supreme Court has added the requirement that a severance pay plan will not be subject to ERISA unless it is necessary to establish an "administrative scheme" to provide the benefits. For example, ERISA does not apply to a one-time severance payment – such as one dictated by a state plant-closing law – that is triggered by an external event and requires no administration or administrative interpretation to make payments. Understandably, court decisions have been unpredictable in determining whether an employer has established an "administrative scheme" to provide benefits in situations which fall between one-time corporate events and ongoing benefit payments.

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