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Everything You Want to Know About ERISA but Failed to Ask!

Ryan J. LoeffersSeptember 2015

Webinar Wednesdays

Copyright © 2015 ES&A, Inc. • All Rights Reserved • Confidential and Proprietary <#>

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


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.


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


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


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


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)


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


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


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


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)


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


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


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


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


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


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


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


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


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


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


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


FOR MORE INFORMATION …

• If you have any follow up questions, email us at – [email protected]– [email protected]

• For access to these materials, email [email protected]

• Watch for our new website – www.esandalaw.com – available later this month

• Our next webinar will be in October!– Next topic to be determined

mailto:[email protected]



http://www.esandalaw.com/

envision, strategize and actualize everything you want to know about erisa but failed to ask! ryan...

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