January 1, 1900

by Maeve E. Cannon and Ryan P. Kennedy

If you are an employer, chances are you have a benefit plan for your employees. Employers with such plans should familiarize themselves with the statutory and regulatory processes impacting the administration of these benefit plans to prevent such a plan from providing an avenue for future lawsuits.

The Employee Retirement Income Security Act of 1974 ("ERISA") is a comprehensive regulation of employee welfare benefit plans, which among other things, creates duties for plan administrators and rights for plan beneficiaries. Most importantly, employers and insurers have a fiduciary duty under ERISA to conduct the plan solely for the interests of the beneficiaries. While one of the purposes of ERISA is to promote and foster employee benefit plans, it also creates a federal cause of action that may be asserted by beneficiaries against plan administrators who violate their duties under the Act. Employers, who are aware of and maintain compliance with ERISA regulations, may reduce the chances of having to defend against a suit and the number of issues should one arise.

Plans Covered by ERISA

While the issue of whether a particular plan constitutes an ERISA plan may sometimes be the subject of debate, generally the statute itself is broad. To be covered, an employee benefit plan must be a plan, fund, or program established or maintained by an employer or an employee organization, for the purpose of providing certain benefits to participants or beneficiaries. Courts have also, on occasion, looked beyond the statute’s definitions and asked if a "reasonable person" would determine that the plan in question constitute a covered employee benefit plan. A narrow exception exists for employers whose involvement in a plan is solely to advertise it to its employees and facilitate payments through paycheck deductions. This is known as the "Safe Harbor" exemption. However, if the employer contributes at all to the plan, if the plan is not completely voluntary, or if the plan is considered part of an employee’s compensation, the benefit plan would not be exempt.

ERISA in General

ERISA creates many duties for covered benefit plans, many more than can be mentioned here. The first and foremost is the fiduciary duty created for plan administrators with discretionary authority over the plan. Plan administrators are held to the standard of a "prudent man" acting on behalf of the plan beneficiaries in all decisions regarding provision of benefits, in diversifying the assets against loss, and in acting in accordance with the plan rules and regulations. Plan administrators are prohibited from managing the benefit plan in such a way that fosters the interest of any party other than the beneficiaries, or in favoring any one or group of beneficiaries over another. Also, an inherent conflict of interest exists where the insurer of the plan is also the plan administrator. In that circumstance, the administrator’s actions will be closely scrutinized to ascertain if a benefit decision was influenced by the potential conflict of interest.

There are also record-keeping and notice requirements which must be observed. For instance, the plan administrator must supply a written summary of the benefits plan to each beneficiary. The plan administrator is required to furnish this and other governing documents to a beneficiary upon written request.

There is also a duty to produce adequate notice of denied benefits. Thereafter, the administrator must provide a "full and fair review" opportunity wherein the plan participant is afforded the opportunity to appeal the benefit denial decision. On appeal to the Courts, a well-reasoned decision premised on a properly developed record without evidence of conflict is subject to an arbitrary and capricious appellate review standard. In other words, the review will be limited to whether the decision was arbitrary and capricious based on the record that was before the plan administrator. In such a situation, the participant will not be afforded a new trial with an opportunity to present new or different evidence. However, evidence of conflict or an unsubstantiated record may trigger a de novo review, which affords the appellant an opportunity to develop and supplement the record regarding his claim.

In addition to having the benefit of an arbitrary and capricious standard of review on appeal, ERISA also provides other advantages for the employer in litigation. For instance, the Statute provides a favorable Federal Court forum for litigation brought under it. Although there is co-extensive jurisdiction with the State Courts, it is generally preferable to remove an action commenced in State Court to Federal Court. Furthermore, state insurance laws and state causes of action are, for the most part, preempted by ERISA. Thus, consideration must be given as to whether any state law claims, punitive damages or other claims for relief should be the subject of a motion to dismiss.

The attorneys at Hill Wallack provide a wide range of employer and insurance related representation, including defense of claims arising from the creation and administration of ERISA regulated benefit plans.

Maeve E. Cannon is a partner at Hill Wallack and member of the Litigation Division and Administrative Law/Government Procurement Practice Group. She concentrates her practice in Administrative Law and Regulatory Compliance including Employment and ERISA Litigation. Ryan P. Kennedy is a student at Seton Hall University School of Law, Class of 2005.