Webinar Wednesdays
Everything You Want to Know About ERISA
but Failed to Ask!
Ryan J. Loeffers
September 2015
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What is ERISA?
• Stands for “Employee Retirement Income Security Act of
1974”
• The federal law that regulates employee benefit “plans”
• Excludes government plans and church plans
• Preempts most state laws that regulate employee benefit
plans
– Does NOT preempt:
• Hawaii Prepaid Healthcare Act
• State insurance laws
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What is a "Plan" under ERISA?
• “An ongoing administrative [benefits] program.”
– Not an ERISA Plan if:
• There is no administration required (e.g. single trigger
severance plan or payroll practices); OR
• The benefit is only provided once.
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What is a "Plan" under ERISA?
• Two types of Plans
– Pension Plans
• Provides traditional retirement benefits (i.e. 401(k), 403(b),
profit sharing, Employee Stock Ownership Plan (“ESOP”), etc.)
• Includes both defined benefit and defined contribution
retirement plans
– Welfare Plans
• All other ERISA-regulated benefit plans
– Health and dental plans
– Unemployment benefits
– Flexible Spending Plans
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Qualified vs. Unqualified Plans
• Plans are also either tax “qualified” or “unqualified”
• Qualified plans
– Provides benefits on a tax-free OR tax-deferred basis
– Must follow the strict provisions of the Internal Revenue Code
• Unqualified plans
– Benefits provided are taxable wages to employees
– Does not follow the requirements of the Internal Revenue Code
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Key Terminology Under ERISA and for Benefits
• Plan Administrator (defined term under ERISA)
– The entity with primary liability for violations of ERISA
– Usually the employer
• Plan administrator (commonly used non-legal term)
– “Little ‘p,’ little ‘a’ plan administrator”
– Commonly used to refer to the HR person in change of an entity’s benefits
– Is not the “Plan Administrator” for ERISA purposes
• Plan Sponsor (defined term under ERISA)
– The entity that decides to establish or terminate a plan or change the
benefits within a plan
– Usually the employer
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Key Terminology Under ERISA and for Benefits
• Participant (defined term under ERISA)
– Employees, their spouses, and dependents that are covered under the plan
• Fiduciary (defined term under ERISA)
– Person (individual or entity) that has responsibility to act in the best
interest of the benefit plan and its participants
– May be personally liable for breaches of fiduciary duty
– “Fiduciary” is a functional term; a fiduciary includes:
• The Plan Administrator
• Persons that provide investment advice for a fee
• Any person who has discretionary control over plan assets (chooses
how to spend money or when money goes out)
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I have an ERISA Plan. What does that mean?
•
•
•
•
•
Broad Liability for the Plan Administrator and Fiduciaries
Strict government oversight
Plan Design Limitations
Documentation Requirements
Notice and Reporting Requirements
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Broad Liability for Plan Administrator/Fiduciaries
• Plan Administrator has statutory liability for violations of ERISA
– Violations range from $110 to $1,100 per day OR per participant per day!
– Statutory violations include late filing, failure to provide notices to participants,
failure to provide documents requested by a participant
• Plan Administrator/Fiduciaries liable for “fiduciary breaches”
– Prohibited transactions
• excise taxes of 20% of the value of the prohibited transaction PLUS 100%
excise tax if the transaction is not corrected
• Not intuitive which transactions are “prohibited”
– Damages that result for breaching a fiduciary duty
• Must make the plan whole
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Broad Liability for Plan Administrator/Fiduciaries
• Fiduciary Duties under ERISA Section 404:
– Act solely in the interest of the participants and beneficiaries;
– Act with the exclusive purpose of providing benefits and defraying reasonable
expenses;
– Act with the care, skill, prudence, and diligence under the circumstances then
prevailing of a prudent person;
– Diversify plan investments to minimize risk of loss; and
– Follow the Plan Document and other documents governing the plan, as long as
they comply with ERISA
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Government Oversight
• United States Department of Labor
– Can sue a fiduciary or the Plan Administrator on behalf of a plan or its
participants
– Enforces penalties for failing to comply with required notices and reporting
requirements
– Issues regulations interpreting ERISA
• Internal Revenue Service
– Imposes excise taxes against fiduciaries for prohibited transactions
– Revokes tax-exempt status for non-compliant plans
– Primary focus is pension plans (though also regulates some aspects of welfare
plans)
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Government Oversight (Cont’d)
• Pension Benefit Guaranty Corporation (defined benefit pension
plans only)
– Insures defined benefit pension plans, similar to how the FDIC insures bank
deposits
– Oversees poorly funded defined benefit pension plans
– Oversees defined benefit pension plans during employer bankruptcy
– Regulates plans in mergers and acquisitions – cannot negotiate how plan
assets will be distributed; must be allocated per ERISA
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Plan Design Limitations
• Tax-Qualified Plans
– Must include all the required provisions stated into the Internal Revenue
Code into the Plan
• Cannot require that a participant work more than a year to participate
• Cannot discriminate in favor of highly compensated employees (almost
all ERISA plans)
• Cannot exclude employees that work at least 1,000 hours per year
(pension plan)
• All ERISA Plans
– Cannot allow employees to assign their benefits to others
– Cannot limit the liability of the Plan Administrator or fiduciaries
– Must comply with documentation and notice requirements
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Documentation Requirements
• Plan Document
– All details about eligibility, benefits provided, premiums/contributions
payable by the employees and employer, etc.
– Each Plan must have its own Plan Document (can combine multiple
benefits into a single plans – e.g. health, dental, and life insurance in a
single plan)
– The Plan Administrator must follow the terms of the Plan Document
• The Plan cannot provide benefits to an employee that is not eligible,
even if the employer wants to extend that employee benefits
• Summary Plan Description
– A summary of the Plan Document must be updated every 5 years if
revised, or every 10 years if not revised
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Notice Requirements
• Form 5500
– Informational tax return filed with the U.S. DOL
– Required for all pension plans and welfare plans with over 100 participants
• Summary Annual Report (SAR)
– Narrative description of the Form 5500 send to participants annually
– Form SAR is included in DOL regulations
• Summary of Material Modifications
– Narrative notice sent to participants when the Plan is amended
• 408(b)(2) Notices (pension plans only; eventually welfare plans)
• Summary of Benefits and Coverage (Health Plans)
– 8 page summary of health benefits
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Your Benefits Team
• Plan Sponsor
– Employer establishing the plan (aka you!)
• Plan Administrator
– Primary liability and primary duty to oversee the Plan
– Normally the employer
• Third Party Administrator
– Entity hired by the Plan Administrator to conduct day-to-day activities of
the Plan
– Large employers may administer the Plan themselves
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Your Benefits Team (Cont’d)
• Benefits Consultant
– Assists the Plan Administrator with routine notices and questions about
plan administration
– May draft simple plan documents
• Insurance Broker
– INDEPENDENT salesperson for the employee benefits insurance products
– Educates and helps Plan Administrator choose insurance products
• Investment Advisor
– Chooses or recommends investments for the Plan
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Your Benefits Team (Cont’d)
• Legal Counsel
– Assists the Plan Administrator with complex issues
– Ensures governing documents are legally compliant
– Assists with revising plan documents pursuant to Plan Sponsor’s
Instructions
– Assists with litigation and agency investigations
– Assists with correcting plan administration errors
– Assists with project management and service provider management
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Common Plan Administration Errors
• Prohibited Transactions
– Transactions that are per se illegal under ERISA
– Does not matter if the transaction is beneficial to the Plan
• e.g. Employer cannot sell assets to the plan, even if sold at significantly
less than FMV
– May file with amnesty programs with IRS and DOL to limit liability after
prohibited transaction is made
• Delinquent Form 5500 filings
– Can file delinquent Form 5500s and pay a significantly reduced fine
• Not filing notices special notices for specific types of plans
– Form M-1 for Multiple Employer Welfare Arrangement (“MEWA”) plans
– 404(a)(1) notices for 401(k) plan
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Common Plan Administration Errors
• Not following the plan document
– e.g not providing matching contributions in a pension plan
• Plan not updated to comply with new laws
– Plan must be updated on a rolling basis based on the last digit of the plan
sponsor’s FEIN.
– Must file notice with IRS that correction was made
• Not supervising or monitoring plan service providers
– Investment advisors must be given benchmarks and terminated if they fall
below benchmarks for too long
– Plan Administrator has a duty to monitor all service providers, even if it
outsources its duties
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Best Practices
• Organize your Benefits Team so service providers work together
• Keep all governing documents well organized
• Plan Document and investment records should be kept
permanently
• Routinely perform new requests for proposals for service providers
• Have an occasional “check-up” of your Plan Documents for
compliance with ERISA
• Ask a benefits consultant or attorney before you revise a benefit
or enter into a complex transaction with your benefits
• Calendar notice deadlines to make sure they are met on time
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Best Practices
• Purchase Fiduciary Liability Insurance to cover costs for any
breaches of fiduciary duty
• File with the IRS and DOL when errors are caught to reduce your
liability
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FOR MORE INFORMATION …
• If you have any follow up questions, email us at
– aes@esandalaw.com
– rloeffers@esandalaw.com
• For access to these materials, email bdasilva@esandalaw.com
• Watch for our new website – www.esandalaw.com – available later
this month
• Our next webinar will be in October!
– Next topic to be determined
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