9. ERISA In Practice - Key Issues Flashcards
Describe 1. The income tax and 2. Payroll tax treatment of contribs to qualified ret plans
- ER receives an immediate income tax deduction for contribs made to a qualified ret plan. EE are not subject to income tax corresponding to the ER’s plan contrib; instead, EE are subject to income tax when they take a distribution.
- ER and EE are not taxed at any time on ER contrib. When EE makes an elective contrib to a 401k/403b, though, those contribs are subject to payroll taxes on both the ER and EE at time of contrib.
Describe the payroll tax for EE who earn wages 1. Below and 2. Above the SS TWB
- EE pays 7.65% of their wages up to the Social Security Taxable Wage Base, and
- 1.45% on wages above it.
TWB is indexed and rises each year.
ER pays the same amount.
There is also a 0.9% payroll tax on higher levels of EE wages, but not on ER.
Explain the tax advantage of shifting ordinary W-2 wages (or future wage increases) into ER contribs to a qualified ret plan
Shifting ordinary W-2 wages (or future wage increases) into ER contribs to a qualified ret plan creates relief from payroll taxes for both ER & EE.
What are the tax advantage of a qualified ret plan, prior to ret?
The savings grow in a qualified ret plan 1. Will avoid all income and payroll taxes at the front end going into the plan, 2. Will avoid taxes on investment income while in the plan and 3. Will avoid the 3.8% tax on unearned income
For claims of fiduciary breach, ERISA contains a statutory limitations period of ## years to cut off the time in which a plaintiff may assert a claim
3 or 6 years, depending on circumstances.
Also note Tibble v. Edison liberalized the 6y statute under certain circumstances.
Describe the case: Heimeshoff v. Hartford Life, and its impact
In this case, USSC gave its blessing to a contractual limitations period, provided that it is reasonable in length and not subject to a controlling statute to the contrary.
Impact: in virtually all cases prior to this ruling, a court would consider a 3y period, maybe 2y period, commencing with a benefit claim denial/other definitive action of a plan admin, to be reasonable. With this decision, it’s now hard to argue that an ERISA plan should not have a contractual limitations period.
ERISA plan doc may have a venue selection clause, that specifies where cases may be brought, and a clause that provides a plaintiff may sue the plan only in the district where the plan’s admin’d.
This is advantageous to the plan - why?
Administrative convenience to plan managers in dealing with suits “at home,” rather than where a retiree resides.
-A consistent set of rulings from a single body of circuit case law affords greater predictability on issues where there’s a clear circuit split, or even just subtle nuance in local case law, local judges, etc.
Consistent legal environment enables the plan that covers participants in more than one district to operate in a more consistent manner.
The plan’s info materials (SPD…) might be well-served by a consistent body of case law. Same can be said of ancillary docs that can trigger lawsuits.
A distinguishing feature of top-hat Ben disputes is that fiduciary duties are not at issue, and courts take a more contract-oriented approach.
One of the most important issues in these cases is the standard of judicial review that will be taken by the court. What are the 2 opposing standards that might be taken in these cases?
Will the judge 1. Review the dispute with a fresh eye (“de novo standard”), or 2. Defer to the plan admin’s decision, unless it is shown to be clearly unreasonable (an “abuse of discretion” or “arbitrary and capricious” standard)?
Does atty-client privilege for confidentiality apply to EBPs? Explain?
The privilege applies in the context of EB law as it does in other areas of the law.
It applies when a lawyer & client communicate with reasonable expectation of privacy. In recent years, courts have increasingly recognized that, although atty-client privilege applies as a general rule, situations can arise when an exception applies to communications involving fiduciary duties.
Severance agreements may/not be considered an EBP and subject to ERISA.
In Donovan v. Dillingham, the US Court of Appeals for the 11th explained the (4) factors necessary to establish such an ERISA plan:
To establish an ERISA severance plan, a reasonable person must be able to ascertain:
- The intended benefits
- The intended beneficiaries
- The source of financing
- The procedure to follow to receive bens
The USSSC case Fort Halifax v Cohen and a stream of circuit court case that flowed from it produced a relatively simple test to determine whether a severance plan is covered by ERISA:
“Does the benefit package implicate an ongoing administrative scheme?”
How much administration is needed to create an ERISA-regulated severance plan?
Not much.
The 9th held that a severance plan that covered 10 top execs and that was triggered when a covered EE was not offered “substantially similar” employment required the admin to engage in an ongoing, particularized, admin analysis.
Can oral severance agrmts become regulated by ERISA? Explain
Yes.
Although ERISA requires that EBP be established pursuant to a written instrument, whether an ER has complied with the ERISA req is not determinative of whether a plan has been established! Court cases have concluded that oral arrangements can become regulated by ERISA.
Is it likely that a one-time pmt to an exec at term of employment will constitute an ERISA-regulated severance plan?
No. A number of cases have established the req of an ongoing administrative scheme.
If term benefits are paid out over a period of years, will these pmts become subject to ERISA?
No.
For example ,in Delaye v Agripac, the 9th stated that the fact that an exec’s severance pmts were to be made each month over a period of 2y did NOT require an ongoing admin scheme.
