The Employee Retirement Income Security Act (ERISA) can be daunting. In this article, we break down some of ERISA’s complexities and highlight its key rules of engagement. Knowledge of these rules can be invaluable in ensuring ERISA compliance, identifying risk and aiding in defense or litigation strategies.
The Employee Retirement Income Security Act (ERISA) can be daunting. In this article, we break down some of ERISA’s complexities and highlight its key rules of engagement. Knowledge of these rules can be invaluable in ensuring ERISA compliance, identifying risk and aiding in defense or litigation strategies.
ERISA has its own civil enforcement scheme, and the universe of claims available to potential litigants is limited. Because ERISA is intended to provide an exclusive set of remedies, it preempts state law claims that relate to ERISA plans. ERISA’s broad preemptive effect means that (1) most state actions are removable to federal court, even if no federal claim appears in the complaint, and (2) any state law claims relating to an ERISA benefit plan (think breach of contract, negligence, bad faith, misrepresentation or fraud) are preempted and subject to dismissal. Remedies are also limited under ERISA. A plaintiff cannot recover punitive damages, damages for pain and suffering, or other types of state law damages. For the most part, a successful plaintiff challenging a benefit denial will be entitled to recover the amount of the benefit due under the terms of the plan. Reasonable attorney’s fees may also be recoverable, at the discretion of the court, assuming the plaintiff can satisfy ERISA’s legal standards.
There are no jury trials under ERISA. For instance, a lawsuit alleging the wrongful denial of benefits will be adjudicated based on dispositive motions submitted by both parties. The court will review the “administrative record” and determine whether the claim fiduciary’s decision to deny benefits was reasonable. The “administrative record” consists of whatever documents and information were gathered and/or considered by the claims fiduciary during the administrative claims process when making the challenged benefit determination.
Under ERISA, the administrative claims process supplants a trial. ERISA also restricts discovery. Generally, discovery outside the administrative record is not permitted in claims for wrongful denial of benefits. Ensuring a full and complete administrative record during the administrative process, therefore, is vital, especially because a defendant likely will be precluded from relying on evidence to support the alleged wrongful claim denial when that evidence was not part of the administrative record during the claims process.
ERISA also provides employers leeway to design a plan providing significant litigation advantages (see The ERISA Advantage below).
ERISA requires plan administrators to respond to a written request for plan documents from a plan participant or beneficiary within 30 days. Documents are generally considered plan documents if they are “instruments under which the plan is established or operated.” The failure to respond in a timely manner to such requests risks assessment by a court of a penalty up to $110 per day for each day that the requested documentation is not provided. These types of claims are common in litigation filed by disgruntled claimants.
While not subject to the same penalty referenced above, claim fiduciaries are also required to provide, upon request, the administrative record to the claimant. Claimants tend to make these requests in connection with filing an appeal or subsequently seeking to challenge a claim denial. The failure to provide a claimant with the requested material risks application of a de novo or less deferential standard of review by the court and also may serve as grounds for a plaintiff to argue entitlement to additional discovery outside of the administrative record.
ERISA has rules requiring distribution of certain basic plan documents to participants. Strict adherence to these rules prevents a claimant from later arguing it cannot be bound by the clear terms of the plan. For example, summary plan descriptions (SPDs) describing medical and other health or welfare benefits must be provided automatically within 90 days of the participant becoming covered under the plan. Pension plan participants or beneficiaries must be provided with the SPD within 90 days after first receiving benefits. Updated SPDs are required every five years if material changes are made; otherwise, they must be distributed every 10 years. Electronic distribution of plan documents is permitted only in certain instances.
Counsel sometimes overlook that a severance plan can be an ERISA plan. When will a severance plan be an ERISA plan? The principal inquiry will be whether there is an ongoing administrative scheme. The more discretion and administration necessary for the severance program’s implementation, the more likely it will be found to be an ERISA plan by a court. For example, a plan that pays different amounts to departing employees based on years of service – where the payment depends on the reason for termination – likely will be construed as an ERISA plan. On the other hand, a plan that pays a lump sum, in the same amount, to all employees due to a plant or facility closure likely will not be construed as an ERISA plan.
Further complicating matters, an ERISA plan does not have to be in writing. An employer can create an “accidental” ERISA plan based on factors such as oral representations, side agreements, the existence of a fund from which benefits are paid, the structure involved in the payment of benefits, how often separation payments are made, the employer’s past practices and intentions, and employee expectations.
If a court finds an ERISA plan, the plan administrator may be subject to penalties for failing to comply with ERISA’s disclosure and reporting requirements (e.g., filing a Form 5500, reporting to the Department of Labor, and providing participants with plan documents).
As discussed above, having an ERISA-governed severance plan can be beneficial. The plan document can be drafted to provide maximum discretion in paying severance benefits. The plan sponsor and plan fiduciary also will have the benefit of ERISA preemption (thereby avoiding state law risks), ERISA’s deferential standard of review, and the ability to craft specific and mandatory claim and appeal procedures. It also eliminates risk of a jury trial and expenses associated with protracted discovery. But remember, this also means the severance plan will be subject to ERISA’s various requirements, including the requirement to adopt reasonable claims procedures, and various reporting and disclosure requirements.
ERISA has its own retaliation and discrimination rules. ERISA Section 510 prohibits interference with benefits and retaliation for a participant’s exercise of rights under ERISA and/or an ERISA plan. Claims alleging violations of Section 510 often involve allegations by an employee that the termination was motived, at least in part, by an employer’s desire to avoid liability or reduce costs under its self-funded health plan. These claims involve medical expenses incurred by the employee, but also expenses incurred by covered dependents of the employee. To minimize potential liability under this section, employers are well-advised to clearly document reasons for termination or other adverse employment actions. Screens also should be established to prohibit and prevent the sharing of information between the benefit plan and the employer. Significantly, proper amendments to an ERISA plan – including those aimed at reducing overall costs – generally cannot be challenged as a Section 510 violation because the amendment does not impact a participant’s employment status.
In-house professionals can use the above guidelines to spot issues, assess risk and, in the event of litigation, make strategic defense decisions. Because of ERISA’s complexities, exceptions to the above rules may exist. Always consult with ERISA counsel when dealing with these difficult legal issues.
1. Standard of Review
The standard of review applied by the reviewing court will depend on whether the plan gives fiduciaries discretion. If the benefit plan has this “magic language,” courts must give deference to the fiduciaries’ decisions, otherwise, the plaintiff will enjoy a heightened standard of review.
2. Statute of Limitations
ERISA permits a plan to adopt stringent limitations periods. As a result, benefit plans can strictly enforce internal deadlines for filing administrative claims and appeals, and a separate deadline for filing lawsuits. The plan can adopt any limitation period, so long as it is reasonable and properly disclosed. The limitation period does not need to mirror those under similar state or federal laws. A lawsuit is barred if a claimant does not timely file a claim or appeal, or if a claimant waits too long to file suit.
3. Administrative Exhaustion
While ERISA lawsuits must be timely, they may not be premature. A plaintiff must exhaust administrative remedies before filing suit. ERISA provides employers with flexibility in crafting internal claim and appeal procedures, and a plan generally can adopt up to two levels of internal mandatory appeals. Lawsuits filed before exhaustion will be dismissed. (There are certain narrow exceptions to this rule, however.)
4. Non-Assignment, Venue, and Arbitration
An employer may limit the classes of parties that have legal standing to bring an ERISA lawsuit. ERISA restricts the types of parties allowed to sue, but plans can provide further limitation through “anti-assignment” clauses. Plans can include forum- or venue-selection clauses and arbitration clauses crafted to align with employers’ litigation strategies.
5. Noncompete
Subject to some exceptions, nonqualified benefit plans (unfunded supplemental retirement plans or “top hat” plans available only to a select group of highly compensated employees) can include noncompetition forfeiture clauses in the event a participant competes following separation from employment. These clauses are generally enforceable – even in states with laws prohibiting noncompete agreements – because of ERISA preemption.
