Printer Friendly

Recent cases examine definition of ERISA "plan."

The Employee Retirement Income Security Act of 1974 (ERISA) imposes a broad range of protective requirements on "employee pension benefit plans" and "employee welfare benefit plans. " Different requirements apply depending on whether the plan is a pension plan or a welfare benefit plan. In either case, the threshold question - i.e., the question that determines whether the ERISA applies at all - is whether the arrangement constitutes a "plan, fund, or program." The definition of these terms has proved to be elusive, and is the subject of continuing litigation.

Letter establishes

ERISA plan

In Williams v. Wright, 11th Cir., 1991, in October 1981, after 34 years of employment with Wright Pest Control Co. (WPCC), James Williams discussed with WPCC president Fred Wright the possibility and terms of Williams's retirement. Wright subsequently gave Williams a letter in which WPCC offered to pay Williams $500 a month starting Jan. 1, 1982, which, when added to the Social Security benefits Williams would begin receiving on that date, would approximately have equaled Williams's monthly net pay at the time. The letter further stated that in exchange for these payments, Williams was expected to be available as a consultant and adviser on pest control matters.

WPCC paid these benefits until September 1985. At that point, Wright informed Williams that WPCC was being dissolved and its assets were being sold to another pest control company. As a result, Williams's retirement benefits were being terminated. Williams brought suit against Wright and WPCC, alleging ERISA violations.

In examining the threshold issue of whether the arrangement with Williams was a plan, fund or program within the meaning of ERISA Section 3(1) or 3(2)(A), the district court applied the guidelines prescribed by the Eleventh Circuit in Donovan v. Dillingham, 688 F2d 1367 (11th Cir. 1982). Those guidelines provide that a plan, fund or program under the ERISA is established if, from the surrounding circumstances, a reasonable person can ascertain -the intended benefits; -a class of beneficiaries; -the source of financing; and -procedures for receiving benefits.

On the basis of these guidelines, the district court concluded that the arrangement with Williams did not constitute a plan, fund or program under the ERISA.

Unlike the district court, the Eleventh Circuit was not troubled by the fact that the only ascertainable source of financing for Williams's benefits was WPCC's general assets, rather than a separate fund or trust. The Eleventh Circuit recognized that (with some exceptions) the assets of an ERISA plan are required to be held in trust; however, it also recognized that an employer's failure to meet an ERISA requirement does not exempt a plan from ERISA coverage. The appeals court concluded that payment of benefits out of an employer's general assets does not affect the threshold question of ERISA coverage.

The district court had also found that the arrangement provided no procedures for receiving benefits. The Eleventh Circuit disagreed; although the procedures provided in Wright's letter were simple, they were sufficiently ascertainable under the Dillingham guidelines.

The district court had also been troubled by the fact that the class of beneficiaries was limited to Williams and his wife. According to the Eleventh Circuit, the use of the word "class" in the Dillingham guidelines need not be interpreted as an absolute requirement of more than one beneficiary. Nothing in the ERISA excludes plans covering a single employee; in fact, Department of Labor (DOL) regulations refer to a plan covering one or more employees as being within the ERIS (DOL Regs. Section 2510.3-3(b)) and several DOL opinion letter confirm that a plan will not be excluded from ERISA coverage merely because it covers only on employee (DOL Opinion Letters 75-09 (6/24/75) and 79-75 (10/19/79). The Eleventh Circuit concluded that if all other requirements are met, a plan covering only a single employee is covered by the ERISA.

The Dillingham guidelines indicated that there was a plan - but was it a pension plan? The Eleventh Circuit found guidance in the Fifth Circuit's opinion in Murphy v. Inexco Oil Co., 611 F2d 570 (5th Cir. 1980). The Murphy analysis would exclude from the ERISA coverage payments that incidently might be made after retirement but were not designed for retirement purposes. Here, Wright's letter indicated that Williams was expected to perform consulting and advisory services for WPCC in exchange for his payments. However, the court noted that Williams in fact performed only minimal, if any, services after he retired from WPCC - and that in other documents, Wright had indicated that the payments were intended as retirement pay.

On the basis of the Dillingham guidelines and the Murphy analysis, the Eleventh Circuit held that Wright's 1981 letter did establish an ERISA pension plan.

Reality controls

In Hollingshead v. Burford Equipment Co., Burford Equipment Co. (BEC) began paying pension benefits on an informal basis in the 1950s. At a 1977 board of directors' meeting, J. Lamar Burford, BEC's president, chairman and sole shareholder, noted that although BEC did not have a formal retirement policy, some guidelines were needed. Burford suggested, for example, that employees should be at least 62 to be eligible for benefits, and that employees with at least 15 years of service should be guaranteed benefits ranging from 40% to 60% of salary, depending on the actual number of years of service. The board voted to adopt these suggested guidelines. The following year, at another board meeting, the guidelines were amended to allow early retirement in "unusual circumstances." The corporate resolutions adopting these guidelines were the only written formulations of BEC's retirement policy.

Between 1977 and 1987, numerous employees retired from BEC, and received pension benefits consistently thereafter. However, in April 1987, BEC sold its assets to Thompson Tractor & Equipment Co. After the sale, existing retirees continued to receive benefits - but no additional employees received retirement benefits pursuant to BEC's retirement policy. Several employees who retired after the sale (and were, thus, receiving no benefits) sued BEC, claiming the company had established a retirement plan under which they were entitled to receive all the benefits that had been promised to them by the company or guaranteed to them under the ERISA.

BEC argued that there was no plan for ERISA purposes; its retirement policy was merely a voluntary, gratuitous service award program under which neither BEC nor Thompson had any obligation to make further payments. In support of that argument, BEC claimed that the decision to pay retirement benefits to any particular employee was discretionary with Burford; that the board's guidelines were not always followed; and that none of the company publications mentioned the BEC retirement policy.

Applying the Dillingham guidelines, the district court stated that it had no difficulty ascertaining that - the intended benefits were monthly pensions after retirement; - the beneficiaries were BEC employees; - the source of financing was BEC's general assets; and - the procedures for receiving benefits were written notice by the employee to his supervisor, calculation of the benefit by a company official pursuant to the board's guidelines, approval by Burford and notification of the payroll department.

The absence of a formal, written plan was not a problem. According to the court, compliance with the ERISA's reporting and fiduciary provisions is not a prerequisite for ERISA coverage; rather, these provisions merely apprise fiduciaries and administrators of their responsibilities under a plan. if the ERISA's purpose is to protect employees, noncompliance with ERISA requirements should not serve as an escape hatch from ERISA coverage. (Compare McQueen v. Salida Coca-Cola Bottling Co., in which an employer's noncompliance with ERISA requirements was evidence that there was no plan.)

The Hollingshead court stated that the definitive requirement is the reality of the payment of specified benefits, regardless of whether the plan is formal or informal, written or unwritten. Here, the reality was that pension benefits had been (and were still being) paid to numerous BEC employees. in view of this reality and the Dillingham guidelines, the court concluded that BEC had indeed established a plan, which was subject to enforcement under the ERISA.

Having found that a plan had been established, the court next had to determine the extent to which BEC had to fund that plan. BEC argued that it should only be required to set up a fund consisting of the value of the contributions it would have made had it been complying with the minimum funding requirements all along. The employees, on the other hand, argued that it would be inequitable to allow BEC to bypass the ERISA's funding requirements for 20 years, and then, aided by hindsight, allow it to choose the funding method that would most effectively minimize the cost to the company. The court agreed with the employees, holding that BEC should be required to establish a trust funded to the extent of the present value of the promised benefits for which the employees had satisfied any applicable conditions for entitlement.

Note: In another case involving an unfunded plan, the DOL brought suit against a corporation and its directors when the corporation went out of business and was unable to meet its benefit obligations. The DOL was seeking a court order requiring the defendants to pay full benefits owed to eligible participants. The suit was settled under a consent order requiring the corporation and its directors to pay approximately two-thirds of the total benefit amount to 46 former employees. See Dole v. Sheffield Tube Corp., DC Conn., 1990.
COPYRIGHT 1992 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Author:Yurkovic, Denis L.
Publication:The Tax Adviser
Date:Jun 1, 1992
Previous Article:Discount partnership arrangements still can be used to reduce transfer taxes.
Next Article:Estate planning for S shareholders: maintaining qualification after death in common estate planning situations.

Related Articles
Nationwide v. Darden: restoring to the term "employee" its common-law meaning.
Current developments in employee benefits.
Obtaining participant consent to benefit distribution.
Union plan is tax exempt as labor organization.
Revenue Reconciliation Act of 1993; Voluntary Compliance Resolution program; fiduciary responsibilities; distribution rules; excise taxes.
Supreme Court reduces exposure for knowing participants in fiduciary breach.
Anti-cutback rules and early retirement benefits.
Current developments in employee benefits.
Consequences of failing to provide suspension-of-benefits notice.
Three 401(k) plan risks every company fiduciary should know.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters