Summary of the Employee Retirement Income Security Act (ERISA)

Congressional research reportMay 19, 2009

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Summary of the Employee Retirement Income

Security Act (ERISA)

(name redacted)

Specialist in Income Security

Jennifer Staman

Legislative Attorney

May 19, 2009

Congressional Research Service

7-....

www.crs.gov

RL34443

CRS Report for Congress

Prepared for Members and Committees of Congress

Summary of the Employee Retirement Income Security Act (ERISA)

Summary

Due to the recent economic decline and the desire to enact large-scale health reform, the current

federal regulation of pension plans, health plans, and other employee benefit plans has received

considerable congressional attention. The Employee Retirement Income Security Act of 1974

(ERISA) provides a comprehensive federal scheme for the regulation of employee pension and

welfare benefit plans offered by private-sector employers. ERISA contains various provisions

intended to protect the rights of plan participants and beneficiaries in employee benefit plans.

These protections include requirements relating to reporting and disclosure, participation, vesting,

and benefit accrual, as well as plan funding. ERISA also regulates the responsibilities of plan

fiduciaries and other issues regarding plan administration. ERISA contains various standards that

a plan must meet in order to receive favorable tax treatment, and also governs plan termination.

This report provides background on the pension laws prior to ERISA, discusses various types of

employee benefit plans governed by ERISA, provides an overview of ERISA’s requirements, and

includes a glossary of commonly used terms.

Congressional Research Service

Summary of the Employee Retirement Income Security Act (ERISA)

Contents

Introduction ................................................................................................................................1

Historical Development of Pension Plans in the United States ...............................................1

Origins of ERISA..................................................................................................................2

Types of Qualified Retirement Plans .....................................................................................3

Hybrid Plans ...................................................................................................................5

The Revenue Act of 1978 and 401(k) Plans .....................................................................5

ERISA: An Overview..................................................................................................................6

ERISA Title I: Protection of Employee Benefit Rights.................................................................7

A. Coverage..........................................................................................................................7

B. Reporting and Disclosure..................................................................................................7

1. Summary Plan Description ..........................................................................................8

2. Summary of Material Modifications ............................................................................8

3. Annual Report .............................................................................................................9

4. Benefit Statements ......................................................................................................9

5. Annual Funding Notice ............................................................................................. 10

6. Notice of Freedom to Divest Employer Securities...................................................... 10

C. Participation Requirements ............................................................................................. 10

D. Benefit Accrual .............................................................................................................. 11

1. Anti-cutback Rule ..................................................................................................... 12

2. Benefit Accrual and Age Discrimination.................................................................... 13

E. Minimum Vesting Standards ........................................................................................... 14

Breaks in Service .......................................................................................................... 15

F. Benefit Protections for Spouses ....................................................................................... 15

1. Preretirement Survivor Benefits................................................................................. 16

2. Postretirement Survivor Benefits ............................................................................... 16

3. Qualified Domestic Relations Orders......................................................................... 17

G. Buyouts, Mergers, and Consolidations ............................................................................ 17

H. Plan Funding .................................................................................................................. 18

1. Funding Requirements for Single-employer Plans ..................................................... 18

2. Valuation of Plan Assets ............................................................................................ 20

3. Benefit Limitations in Underfunded Plans ................................................................. 21

4. Lump-sum Distributions............................................................................................ 22

5. Funding Requirements for Multiemployer Plans ........................................................ 23

I. Fiduciary Responsibility .................................................................................................. 25

1. Duty of Loyalty......................................................................................................... 25

2. Duty of Prudence ...................................................................................................... 26

3. Duty to Diversify Investments ................................................................................... 27

4. Duty to Act in Accordance with Plan Documents....................................................... 28

5. Prohibited Transactions ............................................................................................. 29

6. Investment Advice..................................................................................................... 31

7. Fiduciary Duty and Participant-Controlled Investment............................................... 32

8. Fiduciary Liability under ERISA Section 409 ............................................................ 33

J. Administration and Enforcement...................................................................................... 34

1. Civil Enforcement under Section 502(a) .................................................................... 34

2. Claims to Enforce Benefit Rights .............................................................................. 35

3. Claims to Redress Breaches of Fiduciary Duty .......................................................... 37

Congressional Research Service

Summary of the Employee Retirement Income Security Act (ERISA)

4. Claims to Enforce Plan Provisions and “Other Equitable Relief” ............................... 38

5. Criminal Enforcement under ERISA and Other Federal Law ..................................... 40

K. Preemption of State Laws ............................................................................................... 41

1. Section 514 ............................................................................................................... 41

2. Section 502 ............................................................................................................... 44

L. Special Regulation of Health Benefits ............................................................................. 44

1. COBRA .................................................................................................................... 44

2. HIPAA ...................................................................................................................... 45

3. Mental Health Parity ................................................................................................. 46

4. Maternity Length of Stay........................................................................................... 47

5. Reconstructive Surgery Following Mastectomies....................................................... 47

ERISA Title II: Internal Revenue Code Provisions..................................................................... 48

A. Limits on Plan Contributions and Benefits...................................................................... 48

1. Defined Benefit Plan Provisions ................................................................................ 48

2. Defined Contribution Plan Provisions........................................................................ 49

B. Coverage and Nondiscrimination .................................................................................... 50

1. Nondiscrimination Test ............................................................................................. 50

2. Safe Harbor Plans...................................................................................................... 51

C. Distributions from Qualified Plans.................................................................................. 52

1. Plan Loans ................................................................................................................ 53

2. Additional Tax on Early Withdrawals ........................................................................ 53

3. Rollovers .................................................................................................................. 54

D. Integration with Social Security...................................................................................... 54

E. Special Rules for “Top-heavy” Plans............................................................................... 55

ERISA Title III: Jurisdiction, Administration, and Enforcement ................................................. 55

ERISA Title IV: Pension Benefit Guaranty Corporation and Plan Termination ........................... 56

A. Premiums for Single-employer Plans .............................................................................. 56

B. PBGC Insurance Limit ................................................................................................... 57

C. Plan Terminations ........................................................................................................... 57

1. Standard Termination ................................................................................................ 58

2. Distress Termination.................................................................................................. 58

3. Involuntary Termination ............................................................................................ 58

D. Employer Liability to the PBGC..................................................................................... 59

E. Reportable Events........................................................................................................... 59

F. Notice Requirements ....................................................................................................... 59

G. Premiums for Multiemployer Pension Plans .................................................................... 59

H. Withdrawal Liability....................................................................................................... 60

Tables

Table 1. Number of Plans, Participants, and Assets by Type of Plan, 1975-2006 ..........................4

Table 2. Maximum Average 401(k) Contributions for Highly Compensated Employees ............. 51

Contacts

Author Contact Information ...................................................................................................... 65

Congressional Research Service

Summary of the Employee Retirement Income Security Act (ERISA)

Introduction

The Employee Retirement Income Security Act of 1974 (ERISA)1 protects the interests of

participants and beneficiaries in private-sector employee benefit plans. Governmental plans and

church plans generally are not subject to the law. ERISA supersedes state laws relating to

employee benefit plans except for certain matters such as state insurance, banking and securities

laws, and divorce property settlement orders by state courts. An employee benefit plan may be

either a pension plan (which provides retirement benefits) or a welfare benefit plan2 (which

provides other kinds of employee benefits such as health and disability benefits). Most ERISA

provisions deal with pension plans. ERISA does not require employers to provide pensions or

welfare benefit plans, but those that do must comply with its requirements. ERISA sets standards

that pension plans must meet in regard to:

•

who must be covered (participation),

•

how long a person has to work to be entitled to a pension (vesting), and

•

how much must be set aside each year to pay future pensions (funding).

ERISA sets fiduciary standards that require employee benefit plan funds be handled prudently

and in the best interests of the participants. It requires plans to inform participants of their rights

under the plan and of the plan’s financial status, and it gives plan participants the right to sue in

federal court to recover benefits that they have earned under the plan. ERISA also established the

Pension Benefit Guaranty Corporation (PBGC) to insure that plan participants receive promised

benefits, up to a statutory limit, should a plan terminate with a lack of sufficient assets to pay

promised benefits. In order to encourage employers to establish pension plans, Congress has

granted certain tax deductions and deferrals to qualified plans. To be qualified for tax preferences

under the Internal Revenue Code (IRC), plans must meet requirements with respect to pension

plan contributions, benefits, and distributions, and there are special rules for plans that primarily

benefit highly compensated employees or business owners.

Responsibility for enforcing ERISA is shared by the Department of the Treasury, the Department

of Labor, and the Pension Benefit Guaranty Corporation (PBGC). In the Department of the

Treasury, the Internal Revenue Service oversees standards for plan participation, vesting, and

funding. The Department of Labor regulates fiduciary standards and requirements for reporting

and disclosure of financial information. The PBGC—a government-owned corporation—

administers the pension benefit insurance program.

Historical Development of Pension Plans in the United States

The first employer-sponsored pension plans in the United States were established in the late 19th

century in the railroad industry. At that time, pensions were regarded as gifts in recognition of

long service rather than as a form of compensation protected by law. Pension benefits often were

paid from employers’ annual revenues and sometimes were reduced or terminated if the company

paying the pension became unprofitable or went out of business.

P.L. 93-406, 88 Stat. 829 (Sept. 2, 1974). ERISA is codified at §§1001 to 1453 of title 29, United States Code and in

§§ 401-415 and 4972-4975 of the Internal Revenue Code.

See ERISA § 3(1), (29 U.S.C. § 1002), for the different types of welfare benefit plans.

Congressional Research Service

Summary of the Employee Retirement Income Security Act (ERISA)

Congress first gave pensions and profit-sharing plans preferential income tax treatment in the

1920s. At that time, few households paid income taxes, so these tax benefits did not immediately

spur the growth of the private pension system. The Revenue Acts of 1938 and 1942 outlined more

specific requirements for “tax-qualified” pension plans, including the requirement that benefits

and contributions not discriminate in favor of highly compensated employees. Tax qualification

means that the employer can deduct the amounts contributed to the plan, the earnings on the

pension trust fund are exempt from taxes until distributed, and covered employees do not have to

pay income tax on the employer’s contributions to the plan.3 Employers also are allowed to

“integrate” their pension benefit formulas with Social Security benefits to partly offset the

relatively more generous income replacement rates that Social Security pays to low-wage

workers.4

During the Second World War (1941-1945), pensions and other deferred compensation

arrangements were exempt from wartime wage controls. Employers who were unable to pay

higher wages due to these controls could increase workers’ total compensation by offering new or

increased pension benefits. Also in 1940s, the federal courts declared that pensions were subject

to collective bargaining, and that employers had to include pensions among the benefits for which

unions could negotiate.5 In addition, the expansion of the income tax to include more households

and the introduction of higher marginal income tax rates made the tax advantages of pensions

considerably more valuable to workers. Both of these developments led to more widespread

adoption of employer-sponsored pensions during the 1950s and 1960s.

Origins of ERISA

As the number and size of private pension plans grew in the 1950s and 1960s, so did the number

of instances in which employers or unions attempted to use the assets of these plans for purposes

other than paying benefits to retired workers and their surviving dependents. In 1958, Congress

passed The Welfare and Pension Plans Disclosure Act,6 which required public disclosure of

pension plan finances. Advocates of the legislation expected that greater transparency of pension

funding would ensure that the funds held in trust for workers’ pensions would not be misused by

plan sponsors. After the Studebaker automobile company terminated its underfunded pension plan

in 1963, leaving several thousand workers and retirees without the pensions that they had been

promised, Congress began considering legislation to ensure the security of pension benefits in the

private sector.

During the early 1970s, both the House and Senate labor committees drafted bills to regulate the

private pension system. The Senate Labor and Public Welfare Committee reported a pension bill

in 1972. Up to that point, the legislation had been handled exclusively as a labor issue, but since

most private pension plans benefitted from the favorable tax treatment accorded them under the

Internal Revenue Code, the Senate Finance Committee also asserted its jurisdiction. As passed by

Congress in 1974, ERISA included elements produced by the House and Senate labor

committees, the House Ways and Means Committee, and the Senate Finance Committee. Title I

When a plan participant receives income from a pension plan, it is taxable income.

Federal law limits the extent to which pension benefits can be reduced as a result of “integration” of the benefits with

Social Security benefits. See 26 U.S.C. § 401(l).

Inland Steel Co. v. National Labor Relations Board, 170 F.2d 247 (7th Cir. 1948). cert. denied, 336 U.S. 960 (1949).

P.L. 85-836, 72 Stat. 997 (Aug. 29, 1958).

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Summary of the Employee Retirement Income Security Act (ERISA)

of the law, which sets standards for pension plans of employers engaged in interstate commerce,

is under the jurisdiction of the House Committee on Education and Labor and the Senate

Committee on Health, Education, Labor, and Pensions. Title II, which makes conforming

amendments to the Internal Revenue Code for tax-qualified plans, is under the jurisdiction of the

House Ways and Means Committee and the Senate Finance Committee. The labor and tax

committees share jurisdiction over the PBGC.

ERISA was signed into law by President Gerald Ford on Labor Day, September 2, 1974.

Congress has amended ERISA over the years to provide greater protection to survivors and

spouses of pension plan participants, improve pension funding practices, strengthen the finances

of the PBGC, alter the limits on tax-deductible pension plan contributions, and to ensure that taxfavored plans are broadly based and do not unduly favor a firm’s owners and other highly

compensated employees.

Before ERISA was enacted, an employer could terminate an unfunded pension plan without being

liable for any additional pension contributions. If there were insufficient assets in the pension

plan to pay all claims, participants had no legal recourse to demand that employers use company

assets to continue funding the plan. ERISA protects the benefits of participants in most privatesector pension plans by requiring companies with defined benefit pension plans to fully fund the

benefits that participants have earned. The law prohibits companies from using pension funds for

purposes other than paying pensions and retiree health benefits. It also limits the age and lengthof-service requirements that firms can require participants to meet to receive a pension. ERISA

also requires all private-sector sponsors of defined benefit pension plans to purchase insurance

from the Pension Benefit Guaranty Corporation.

Types of Qualified Retirement Plans

ERISA and the IRC classify employer-sponsored retirement plans as either defined benefit (DB)

plans or defined contribution (DC) plans.7 A defined benefit plan specifies either the benefit that

will be paid to a plan participant or the method of determining the benefit. The plan sponsor’s

contributions to the plan vary from year to year, depending on the plan’s funding requirements.

Benefits often are based on average pay and years of service. For example, the benefit might be

defined as 1.5% of the average of the employee’s highest five years of pay multiplied by his or

her number of years of service. This would result in a benefit equal to 45% of a participant’s

“high-five” average pay after 30 years of service. Some DB plans, particularly plans covering

workers who belong to unions, pay a flat benefit per year of service. For example, if the benefit is

defined as $30 per month for each year of service, the monthly pension benefit after 30 years of

service would be $900.

ERISA requires DB plans to be fully funded. The assets held in the pension trust must be

sufficient to pay the benefits that the plan’s participants have earned. The employer bears the

investment risk for the assets held by the plan. If the assets decrease in value, or if the plan’s

liabilities increase, the plan sponsor must make additional contributions to the pension trust fund.

The assets of qualified DB plans are exempt from creditors’ claims if the sponsor is in

bankruptcy, and DB plan benefits are insured up to certain limits by the Pension Benefit Guaranty

Corporation.

29 U.S.C. § 1002(34) and § 1002(35); 26 U.S.C. § 414(i) and § 414(j).

Congressional Research Service

Summary of the Employee Retirement Income Security Act (ERISA)

A defined contribution plan is one in which the contributions are specified, but not the benefits. A

defined contribution plan (also called “an individual account” plan) is one that provides an

individual account for each participant that accrues benefits based solely on the amount

contributed to the account and any income, expenses, and investment gains or losses to the

account.8 The employee bears the investment risk in a DC plan, and DC plans are not insured by

the PBGC.

When ERISA was enacted in 1974, most employer-sponsored retirement plans were defined

benefit plans. The number of defined benefit plans continued to grow until the mid-1980s. The

number of DB plans then began to fall while the number of DC plans increased. Analysts have

suggested several possible reasons for these trends, including rising global competition that put

greater pressure on companies to reduce costs, a more mobile workforce that preferred the

portability of benefits earned in DC plans, the higher costs of maintaining DB plans after stronger

funding requirements were put into place by ERISA, and the greater attractiveness of DC plans

after Section 401(k) of the tax code was added by the Revenue Act of 1978.9 Although the

standards established under ERISA have made workers’ pensions more secure, some employers—

especially small employers—apparently decided that the plan funding requirements of ERISA

made DB plans too expensive to maintain. The decline in the number of DB plans since the 1980s

has been the result mainly of terminations of small plans. By the late 1990s, defined contribution

plans had overtaken defined benefit plans in number of plans, number of participants, and total

assets. (Table 1.)

Table 1. Number of Plans, Participants, and Assets by Type of Plan, 1975-2006

Defined Benefit Plans

Participants

(thousands)

Defined Contributions Plans

Assets

(millions)

Participants

(thousands)

Assets

(millions)

Year

Plans

1975

103,346

33,004

$185,950

207,748

11,507

$74,014

1980

148,096

37,979

401,455

340,805

19,924

162,096

1985

170,172

39,692

826,117

461,963

34,973

426,622

1990

113,062

38,832

961,904

599,245

38,091

712,236

1995

69,492

39,736

1,402,079

623,912

47,716

1,321,657

2000

48,773

41,613

1,986,177

686,878

61,716

2,216,495

2004

47,503

41,707

2,106,325

635,567

64,627

2,587,152

2005

47,614

41,925

2,254,032

631,481

75,481

2,807,590

2006

48,579

42,146

2,468,142

645,971

79,849

3,216,160

Plans

Source: U.S. Department of Labor, Private Pension Plan Bulletin: Abstract of Form 5500 Annual Reports, various

years.

Note: Includes active participants, vested separated participants, and retired participants. Beginning in 2005, data

for defined contribution plan participants includes individuals for whom no contributions were being made to the

plan.

26 U.S.C. § 414(i).

P.L. 95-600, 92 Stat. 2826 (Nov. 6, 1978).

Congressional Research Service

Summary of the Employee Retirement Income Security Act (ERISA)

Hybrid Plans

In recent years, many employers have converted their traditional DB plans to “hybrid” plans that

have characteristics of both defined benefit and defined contribution plans. The most common of

these hybrids is the cash balance plan. A cash balance plan looks like a defined contribution plan

in that the accrued benefit is defined in terms of an account balance. The employer contributes an

amount equal to a fixed percentage of pay to the plan and pays interest on the accumulated

balance. However, a cash balance plan is not an individual account owned by the participant.

Assets are held in a common trust, and each participant’s “account balance” is merely a record of

his or her accrued benefit. Because plan sponsors are obligated to provide the participants with

benefits that are no less than the sum of contributions to the plan plus interest, cash balance plans

are considered to be defined benefit plans.10

The Revenue Act of 1978 and 401(k) Plans

The most common defined contribution plans are 401(k) plans, named for the section of the IRC

added by the Revenue Act of 1978 under which they were authorized. In 1981, the IRS published

regulations for IRC §401(k). Soon after, the first 401(k) plans were established. A 401(k) plan is

an “individual account plan.”11 Its defining feature is that the employee, as well as the employer,

can make pre-tax contributions to the account. Taxes on these contributions and on investment

earnings are deferred until the money is withdrawn. Before Section 401(k) was enacted, DC plans

for private-sector employees were funded by employer contributions or by after-tax employee

contributions.12 Typically, participants in a 401(k) plan can allocate their account balances among

a menu of investment options selected by the employer or by a plan administrator appointed by

the employer. The participant’s retirement benefit consists of the balance in the account, which is

the sum of all the contributions that have been made plus interest, dividends, and capital gains (or

losses) minus fees and expenses. Upon separating from the employer, the participant usually has

the choice of receiving these funds through a series of withdrawals or as a lump sum. Some

401(k) plans allow participants to purchase a life annuity through an insurance company, but

defined contribution plans are not required to offer annuities.13

In most 401(k) plans, the employee must elect to have contributions to the plan deducted from his

or her pay, decide how much to have deducted, and direct these contributions among the plan’s

investment options.14 The employer often contributes either a fixed dollar amount or percentage

of pay to the account on behalf of each participant. Employer contributions are sometimes

conditioned on the employee also making contributions. In a 401(k) plan, the employer can

reduce or suspend its contributions to the plan if business conditions are unfavorable for the firm,

See “2. Benefit Accrual and Age Discrimination” in section III for additional discussion of hybrid plans.

IRC §401(k) authorizes “cash or deferred arrangements,” under which an employee may elect to have the employer

make payments as contributions to a trust fund on behalf of the employee in lieu of receiving that portion of his or her

compensation in cash.

Salary deferral plans under IRC §403(b) and §457 predate §401(k), but these plans are available only to employees

of tax-exempt organizations and state and local governments.

An exception to this rule is the “money purchase plan,” which is a DC plan but also is a pension plan established

under IRC §401(a), and must offer plan participants an annuity.

Some firms automatically enroll all eligible employees in their 401(k) plans, so that the default condition is for the

employee to be enrolled with the option to quit the plan.

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Summary of the Employee Retirement Income Security Act (ERISA)

or for any other reason. Although 401(k) plans are the most numerous DC plans, they are not the

only kind of DC plan. (See box below.)

ERISA and the pension provisions of the Internal Revenue Code have been amended several

times since ERISA was enacted in 1974. The most significant changes to ERISA since its original

passage were enacted in the Pension Protection Act of 2006 (PPA)(P.L. 109-280).15 In December

of 2008, Congress passed the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA)

(P.L. 110-455), which makes several technical corrections to the Pension Protection Act of 2006

(P.L. 109-280) and contains provisions designed to help pension plans and plan participants

weather the current economic downturn.16 Amendments made to ERISA by the PPA and WRERA

are discussed below.

Principal Types of Defined Contribution Plans

A. Qualified plans under Internal Revenue Code §401(a)

1. Money purchase pension plans

a. Traditional money purchase plans

b. Target benefit plans

c. Thrift plans (other than profit sharing plans)

2. Profit sharing plans

a. Traditional profit sharing plans

b. Thrift plans

c. Cash or deferred arrangements (IRC §401(k))

3. Stock bonus plans

a. Traditional stock bonus plans

b. Employee stock ownership plans (ESOPs)

4. Voluntary employee contributions under qualified plans

B. Tax-deferred annuities under IRC §403(b)

C. Deferred compensation plans for state and local governments and tax-exempt organizations under IRC §457

D. Individual retirement accounts (IRAs and Roth IRAs) under IRC §408 and §408A

E. Non-qualified plans (Plans that do not qualify under the Internal Revenue Code)

Source: D. McGill and D. Grubbs, Fundamentals of Private Pensions, 6th edition.

ERISA: An Overview

ERISA consists of four titles. Title I sets out specific protections of employee rights in pensions

and welfare benefit plans. Title II specifies the requirements for plan qualification under the

Internal Revenue Code. Title III assigns responsibilities for administration and enforcement to the

For more information, see CRS Report RL33703, Summary of the Pension Protection Act of 2006, by (name redacted).

For more information on WRERA, see CRS Report R40171, The Worker, Retiree, and Employer Recovery Act of

2008: An Overview, by Jennifer Staman.

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Summary of the Employee Retirement Income Security Act (ERISA)

Departments of Labor and Treasury. Title IV of ERISA establishes the Pension Benefit Guaranty

Corporation.

ERISA Title I: Protection of Employee Benefit

Rights

A. Coverage

Title I of ERISA covers employee pension and welfare benefit plans17 established or maintained

by employers in the private sector. The law specifically exempts governmental plans and church

plans. Plans that are maintained only for the purpose of complying with applicable workmen’s

compensation laws, unemployment compensation, or disability insurance laws, as well as plans

that are maintained outside of the United States (primarily for the benefit of persons who are nonresident aliens) are also exempted from ERISA’s Title I requirements.

B. Reporting and Disclosure

Section 2(b) of ERISA states that it is the policy of ERISA “to protect ... the interests of plan

participants and their beneficiaries by requiring disclosure and reporting of financial and other

information.” Both pension and welfare benefit plans can be subject to extensive reporting and

disclosure requirements that can be found under Sections 101 through 111 of ERISA. 18 These

sections may require disclosure of information to plan participants and beneficiaries, as well as

reporting of pension and welfare plan information to governmental agencies. Some of the

reporting and disclosure requirements provide that certain materials must be disseminated or

made available to participants at reasonable times and places. Other requirements arise only upon

the written request of a plan participant or beneficiary or upon the occurrence of a specific event.

Reports and disclosures required by ERISA include summary plan descriptions, annual reports,

and summaries of plan modifications. In addition, the Pension Protection Act of 2006 (PPA)19

made enhancements to the reporting and disclosure requirements, requiring the provision of

ERISA § 4, 29 U.S.C. § 1003. It should be noted that the question of whether a plan exists under ERISA can

sometimes be a litigated question. If it is found that a plan does not exist with respect to a particular employee benefit,

then the requirements of ERISA will not apply. See generally, e.g., Massachusetts v. Morash, 490 U.S. 107 (1989)

(vacation pay benefits not considered an employee benefit plan); see also Fort Halifax Packing Co. v. Coyne, 482 U.S.

1 (1987) (Court explains that one-time, lump-sum severance payment lacked an administrative scheme did not create a

plan under ERISA).

See ERISA § 101 et. seq., 29 U.S.C. § 1021 et. seq. and accompanying regulations. However, under Section

104(b)(3) of ERISA (29 U.S.C. § 1024(b)(3)), the Secretary may issue regulations exempting any welfare benefit plan

from all or part of the reporting and disclosure requirements under Title I of ERISA, or may provide for simplified

requirements if the Secretary finds that the act’s requirements are inappropriate. Under this authority, the Secretary has

issued regulations containing certain simplified reporting provisions and limited exemptions from reporting and

disclosure requirements for small plans, including unfunded or insured welfare benefit plans, that cover fewer than 100

participants and satisfy certain other requirements. See 29 C.F.R. § 2520.104.

It should also be noted that additional reporting and disclosure provisions exist under other sections of ERISA. See,

e.g., COBRA, P.L. 99-272, 100 Stat. 82 (1986), which requires health plans to issue notices related to continued

medical insurance coverage. ERISA § 606, 29 U.S.C. § 1166.

P.L. 109-280, 120 Stat. 780 (Aug. 17, 2006).

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Summary of the Employee Retirement Income Security Act (ERISA)

statements of a participant’s total accrued benefits,20 an annual funding notice for single-employer

plans, as well as a notice of eligibility to divest employer securities.

1. Summary Plan Description

As a mechanism for informing plan participants of the terms of the plan and its benefits, ERISA

requires that plan administrators furnish to participants a summary plan description (SPD).21 A

SPD is a written summary of the provisions of an employee benefit plan that contains the terms of

the plan and the benefits offered.22 It must be written in a manner that can be understood by the

average plan participant and be sufficiently accurate and comprehensive to reasonably apprise

participants and beneficiaries of their rights and obligations under the plan.23

ERISA specifies what the SPD must contain. 24 It must state when an employee can begin to

participate in the plan, describe the benefits provided by the plan, state when benefits become

vested, and describe the remedies available if a claim for benefits is denied in whole or in part. If

a plan is altered, participants must be informed, either through a revised SPD, or in a separate

document, called a summary of material modifications (discussed below), both of which must

also be given to plan participants.

2. Summary of Material Modifications

Under Section 104(b)(1), a plan administrator must provide a summary of any material

modification (SMM) in the terms of the plan as well as any change in information required to be

included in the SPD.25 This summary must be provided, in most cases, within 210 days after the

close of the plan year in which the modification was adopted, and also must be furnished to the

Labor Department upon request. 26 Similar to the SPD, the materials must be written in a manner

that can be understood by the average plan participant. While ERISA does not define “material

modification” and does not specifically cover what changes warrant an SMM,27 courts have

addressed this issue. 28 Courts have held plan amendments such as the establishment and

elimination of benefits are material modifications. 29 However, as courts have also pointed out, not

all plan amendments are material modifications.30

29 U.S.C. § 1025(a)(1).

ERISA § 101, 29 U.S.C. § 1021; 124 A.L.R. Fed. 355 (citing Hicks v Fleming Cos., 961 F.2d 537 (5th Cir. 1992)).

124 A.L.R. Fed. 355.

ERISA § 102(a)(1), 29 USC 1022(a)(1); See also S.Rept. 93-127, 2d Sess, (Apr. 18, 1973).

Hicks v. Fleming Cos., 961 F.2d 537 (5th Cir. 1992).

29 U.S.C. § 1024(b)(1), ERISA § 102(a); 29 U.S.C. § 1022(a); 29 C.F.R. § 2520.104b-3.

ERISA § 104(b)(1), 29 U.S.C. § 1024(b)(1); 29 C.F.R. § 2520.104a-8.

However, regulations provide a special rule for health plans. Subject to an exception, an SMM shall be furnished if

there is a “material reduction in covered services or benefits.” 29 C.F.R. § 2520.104b-3.

EMPLOYEE BENEFITS LAW (Matthew Bender 2d ed.)(2000).

See, e.g., Baker v. Lukens Steel Co., 793 F.2d 509 (3rd Cir. 1986)(elimination of an early retirement benefit option

was a material modification); American Fed’n of Grain Millers v. International Multifoods Corp., 1996 U.S. Dist.

LEXIS 9399 (W.D.N.Y. 1996) aff’d, 116 F.3d 976 (2d Cir. 1997) (amendment to a medical plan requiring retirees to

pay a portion of premiums considered a material modification).

See, e.g., Hasty v. Central States, Southeast and Southwest Areas Health and Welfare Fund, 851 F. Supp. 1250, 1256

(N.D. Ind. 1994) (amendments more specifically providing for a trustee’s discretionary authority under an employee

(continued...)

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3. Annual Report

Section 103 of ERISA provides that certain employee benefit plans must file an annual report

with the Department of Labor.31 The annual report is considered to be a primary source of

information concerning the operation, funding, assets, and investments of employee benefit

plans.32 It is regarded as a compliance and research tool for the Labor Department, and a source

of information and data for use by other federal agencies, Congress, and private groups in

assessing employee benefit, tax, and economic trends and policies.33 While the annual report can

also be an important disclosure document for plan participants, participants must request a copy

from a plan administrator.34

The annual report must include a detailed financial statement containing information on the plan’s

assets and liabilities, an actuarial statement, as well as various other information, depending on

the type of the plan and the number of participants. Plan administrators must make copies of the

annual report available at the principal office of the plan administrator and at other places as may

be necessary to make pertinent information readily available to plan participants.35

The annual report must be filed within seven months after the close of a plan year, and extensions

may be available under certain circumstances. 36 The annual report is to be filed with the

Department of Labor on Form 5500.37 In 2006, the DOL published a rule requiring electronic

filing of Form 5500 annual reports for plan years beginning on or after January 1, 2008.38

4. Benefit Statements

Under Section 105 of ERISA, plan administrators are required to periodically furnish a pension

benefit statement to participants and beneficiaries.39 For defined contribution plans, a pension

benefit statement must be provided (1) every calendar quarter to participants and beneficiaries

who have the right to direct the investments of the account, or (2) once each calendar year for

participants and beneficiaries who have accounts with the plan, but do not have control over the

investment in the account.40 Section 105 also provides that plan administrators of defined benefit

(...continued)

benefit plan were not a material modification because the amendments “simply clarify a power”).

ERISA § 103; 29 U.S.C. § 1023. Labor Department regulations exempt some plans from the annual reporting

requirement. For example, welfare benefit plans having fewer than 100 participants may be exempted if certain

conditions are met. 29 C.F.R. § 2520.104-20.

72 Fed. Reg. 64710 (Nov. 16, 2007).

Id.

ERISA § 104(b), 29 U.S.C.§ 1024(b).

ERISA § 104(b)(2), 29 U.S.C.§ 1024(b)(2). Under this section, other materials, such as a bargaining agreement or

trust agreement affecting the plan may also be made available.

See 29 C.F.R. § 2520.104a-5.

While ERISA and the Internal Revenue Code provide that other annual reports must be filed with the PBGC and the

Internal Revenue Service, these reporting requirements can be satisfied by filing Form 5500 with the Labor

Department.

29 C.F.R. § 2520.104a-2.

ERISA provides an exception to this requirement for one-participant retirement plans. ERISA § 105; 29 U.S.C. §

1025.

Under this section, beneficiaries of a plan that do not fall into either category can request a pension benefit statement

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plans must furnish benefit statements to participants and beneficiaries at least once every three

years to any individual who has both a non-forfeitable accrued benefit and is employed by the

employer maintaining the plan at the time the statement is furnished. Statements to participants in

defined benefit plans must also be provided upon request. Pension benefit statements must

indicate information such as amount of non-forfeitable benefits, accrued benefits, and the earliest

date on which accrued benefits become non-forfeitable. Benefit statements covering a defined

contribution plan must also include the value of each investment to which assets have been

allocated in a participant or beneficiary’s account.

5. Annual Funding Notice

Defined benefit plan administrators must also provide an annual plan funding notice. 41 While in

previous years funding notices have been furnished by multiemployer plans, single-employer

plans must provide this notice beginning in 2008. The required annual notices include

information about the plan’s funding policy, assets, and liabilities; a statement of the number of

participants; and a general description of the benefits that are eligible to be guaranteed by the

PBGC.42 The notice must be provided to the PBGC, plan participants and beneficiaries, labor

organizations representing such participants or beneficiaries, and, in the case of a multiemployer

plan, to each employer who has an obligation to contribute to the plan.

6. Notice of Freedom to Divest Employer Securities

The PPA amended the disclosure provisions of ERISA to require plan administrators to provide

participants with a notice of their eligibility to divest employer securities held in a defined

contribution plan. Section 101(m) of ERISA requires plan administrators to provide this notice to

applicable individuals at least 30 days before the date on which the individual is eligible to divest

these securities.43 The notice must inform the participant that he or she has the right to direct

divestment of the employer securities and informed of the importance of diversifying the

investment of retirement account assets. The notice must be written in a manner that can be

understood by the average plan participant. It may be delivered in written, electronic, or other

appropriate form that is reasonably accessible to the recipient.

C. Participation Requirements

ERISA restricts the amount of time an employee can be excluded from participating in a pension

plan.44 Under ERISA Section 202(a)(1)(A), an employee can only be excluded from an ERISA

pension plan on account of age or service if the employee is under age 21 or has not yet

(...continued)

from a plan administrator. ERISA § 105, 29 U.S.C. § 1025.

ERISA§ 101(f), 29 U.S.C. § 1021(f).

Information required to be on a plan’s funding notice is different, depending on whether the plan in question is a

single-employer or multi-employer plan. See ERISA § 101(f)(2)(B), 29 U.S.C. § 1021(f)(2)(B).

29 U.S.C. § 1021(m).

Section 410 of the Internal Revenue Code contains similar participation requirements. See 26 U.S.C. § 410(a).

Section 410 also contains coverage rules intended to ensure that a pension plan covers both highly compensated

employees and other employees proportionately. 26 U.S.C. § 410(b). Participation and coverage requirements must be

met in order for a plan to be considered qualified (i.e., eligible for favorable tax treatment).

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completed a year of service. 45 The term “year of service” is defined as a 12-month period during

which the employee has worked at least 1,000 hours.46

Alternatively, in the case of a plan under which a participant’s benefits are 100% vested47 after no

more than two years of service, a plan may require two years of service prior to participating in

the plan. 48 Plans maintained for employees of certain educational institutions which provide for

100% vesting after one year may condition participation on an employee’s becoming 26 years old

or completing one year of service, whichever is later.49

Once an employee becomes eligible to participate, a plan must enroll the employee no later than

(1) the first day of the plan year or (2) six months after the date of satisfaction of the participation

requirements, whichever is earlier.50 ERISA also prohibits pension plans from excluding

employees from participation in the plan after an employee has attained a certain age.51

D. Benefit Accrual

Section 204 of ERISA governs benefit accrual, which generally refers to the rate at which benefits

are earned by a plan participant.52 An “accrued benefit” is defined differently for defined benefit

and defined contribution plans. For defined benefit plans, accrued benefit means an individual’s

benefit determined under the plan and expressed in the form of an annual benefit commencing at

normal retirement age, subject to exceptions.53 ERISA provides three primary methods for benefit

accrual under a defined benefit plan:

•

Under the “133-1/3 rule,” generally, a later rate of accrual for one year of plan

participation cannot be more than 133-1/3 percent of the rate for any other plan

year.

Courts have found that ERISA’s minimum participation requirements only prevent employers from denying

participation in a plan on basis of age or length of service. These requirements do not prevent employers from denying

plan participation on any other basis. As stated by the Third Circuit in Bauer v. Summit Bancorp, “In fact, an employer

could even exclude all persons whose names begin with the letter ‘H,’ as long as this was not deemed to be

discriminatory in application.” 325 F.3d 155, 166 n.2 (3rd Cir. 2003).

An employee’s eligibility to participate in a pension plan may be affected if there is a break in the employee’s period

of service. ERISA 202(b), 29 U.S.C. § 1052(b). For example, if an employee has had a one-year break in service, a

plan is not required to take into account any previous service performed in calculating the employee’s period of service.

A one-year break in service is a 12-consecutive-month period in which the employee has not completed more than 500

hours of service. ERISA § 203(b)(3)(A), 29 U.S.C. § 1053(b)(3)(A).

For information on the vesting of benefits under ERISA, see discussion under “E. Minimum Vesting Standards” in

section IV infra.

This variation is not available for 401(k) plans. Under §401(k)(2)(D), an employee with one year of service must be

allowed to elect to make pre-tax contributions to the plan.

ERISA § 202(a)(1)(B)(ii), 29 U.S.C. § 1052(a)(1)(B)(ii).

ERISA § 202(a)(4), 29 U.S.C. § 1052(a)(4).

ERISA § 202(a)(2), 29 U.S.C. § 1052(a)(2).

In DiGiacomo v. Teamsters Pension Trust Fund, 420 F.3d 220, 223 (3rd Cir. 2005), Justice Alito, in his former

position as a Third Circuit Judge, stated that accrued benefits, “are like chalk marks beside the employee’s name ... they

are conditional rights that do not become irrevocabl[e] ... until they vest.”

ERISA § 3(23)(A), 29 U.S.C. § 1002(23)(A).

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•

Under the “3% rule,” a participant must accrue at least 3% of the participant’s

anticipated normal retirement benefit in each year of participation, up to a

maximum of 33-1/3 years.

•

Under the “fractional rule,” benefit accrual is focused on a worker’s

proportionate years of service under the plan. For example, if benefits can accrue

for a maximum of 40 years up to the date of the plan’s normal retirement age

(such as 65), a worker starting under the plan at age 25 and working to age 60

would get 35/40 of the maximum credit toward a pension.54

These tests limit the amount of “backloading,” a practice of providing a higher benefit accrual

rate for later years of service than for earlier years. “Front loading” benefits (providing a higher

accrual rate for earlier years of service than for later years) is permitted, but decreases in the rate

of benefit accrual cannot be based on the participant’s age.

In a defined contribution plan, the participant’s accrued benefit is the balance in his or her

account.55 Participants begin accruing a benefit in a defined contribution plan once they have met

the participation requirements under the terms of the plan.56 However, if an employer makes

contributions to an employee’s account, the accrued benefit received may be treated differently

for vesting purposes than the accrued benefit from employee contributions.57

1. Anti-cutback Rule

ERISA Section 204(g) prohibits plan amendments that eliminate or reduce benefits already

accrued by plan participants.58 This prohibition is commonly referred to as the “anti-cutback

rule.”59 Benefits subject to the anti-cutback rule include basic accrued benefits, as well as any

early retirement benefits, “retirement-type” subsidies, and other optional forms of benefits that an

individual who has met certain requirements (as defined by the plan) is eligible to receive.

However, the anti-cutback rule does not prevent a plan from freezing accrued benefits, reducing

the rate at which benefits will accrue in the future, or eliminating future benefit accruals

altogether.

Although an accrued benefit is generally defined in monetary terms, the Supreme Court has held

that the anti-cutback rule applies not only to a particular sum of money, but to a plan amendment

which hinders a participant’s receipt of benefits.60 In Central Laborers’ Pension Fund v. Heinz,61 a

retired plan participant’s benefits were suspended by the plan following a plan amendment that

prohibited participants from engaging in the type of post-retirement employment he performed.

ERISA § 204(b)(1), 29 U.S.C. § 1054(b)(1), 26 U.S.C. § 411(b). See also 26 C.F.R. § 1.411(b)-1.

See ERISA § 3(23), 29 U.S.C. § 1002(23)(B).

See section I(C) discussing ERISA’s participation requirements.

See ERISA § 204(c), 29 U.S.C. § 1054(c).

29 U.S.C. § 1054(g).

Certain exceptions to the anti-cutback rule may apply. For example, ERISA allows for a plan to reduce accrued

benefits by a retroactive amendment in certain cases where a plan is confronted with a “substantial business hardship.”

ERISA § 204(g)(1), 29 U.S.C. § 1054(g)(1) (citing ERISA § 302(d)(2), 29 U.S.C. § 1082(d)(2)).

Patrick C. DiCarlo, ERISA’S ANTI-CUTBACK RULE : THE PITFALLS OF PLAN MODIFICATION, 60 Employee Benefit Plan

Review 5 (2006).

Central Laborers’ Pension Fund v. Heinz, 541 U.S. 739 (2004).

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The plaintiff claimed that this suspension violated ERISA’s anti-cutback rule. The plan argued,

among other things, that the anti-cutback rule applies only to amendments affecting the dollar

amount the plan was obligated to pay, and that a mere suspension of benefits did not eliminate or

reduce an accrued benefit. The Court rejected this argument and affirmed the decision of the

lower court, stating that “as a matter of common sense, a participant’s benefits cannot be

understood without reference to the conditions imposed on receiving those benefits, and an

amendment placing materially greater restrictions on the receipt of the benefit ‘reduces’ the

benefit just as surely as a decrease in the size of the monthly benefit payment.”62

2. Benefit Accrual and Age Discrimination

ERISA contains provisions designed to prevent age discrimination in benefit accrual.63 Section

204(b)(1)(H) of ERISA prohibits a defined benefit plan from ceasing accruals or reducing the rate

of accrual on account of the employee’s age. Section 204(b)(2)(A) of ERISA provides that for

defined contribution plans, allocations to an employee’s account may not cease, and the rate at

which amounts are allocated to an employee’s account may not be reduced on account of age.

Over the past few years, several courts have evaluated these provisions in determining whether

cash balance plans64 are age-discriminatory. Discrimination has been alleged, among other things,

because of the structure of a cash balance plan, under which employees receive both pay credits

and interest credits. After the employee terminates employment, pay credits will generally cease,

but an employee will typically continue to earn interest credits. Because a younger employee has

more time before retirement age in which to earn interest than an older employee, an accrued

benefit may be greater for a younger employee. This result, some have argued, violates the age

discrimination provisions. While certain district court decisions have held that cash balance plans

violate the age discrimination provisions, all appellate courts to evaluate this issue have found

that the plans are not age discriminatory.65

The PPA amended the benefit accrual requirements of ERISA, as well as other federal laws, by

adding new standards under which a plan can be considered inherently non-age discriminatory.66

Under the act, a plan is not considered age discriminatory if a participant’s entire accrued benefit,

as determined under the plan’s formula, is at least equal to that of any similarly situated, younger

individual. A “similarly situated” individual is defined as an individual who is identical to the

participant in every respect, including length of service, compensation, position, and work

history, except for age. The PPA provides that cash balance plans do not discriminate against

older workers if, among other things, benefits are fully vested after three years of service and

Id. at 745.

Age discrimination provisions are also included in the Internal Revenue Code and the Age Discrimination in

Employment Act. See IRC § 411(b)(1)(H); 29 U.S.C. § 623(i)(1). Although the language under all three laws is not

identical, these laws are intended to be interpreted in the same manner. H. Rep. 99-727 at 378-79; P.L. 99-509, §

9204(d).

A cash balance plan is a “hybrid plan,” (i.e., a plan that has characteristics of both defined benefit and defined

contribution plans). Cash balance plans are defined benefit plans that look like defined contribution plans because the

employee’s accrued benefit is stated as an account balance. In a cash balance plan, the “account balance” is a record of

the benefit accrued by the participant, but it is not an individual account owned by the participant.

See, e.g., Hirt v. Equitable Ret. Plan for Employees, Managers and Agents, 533 F.3d 102 (2d Cir. 2008); Register v.

PNC Fin. Servs. Group, Inc., 477 F.3d 56 (3rd Cir. 2007); Drutis v. Rand McNally & Co., 499 F.3d 608, 610 (6th Cir.

2007); IBM Pers. Pension Plan v. Cooper, 457 F.3d 636 (7th Cir. 2006), cert. denied, 549 U.S. 1175 (2007).

ERISA § 204(b)(5), 29 U.S.C. § 1054(c); IRC § 411(b)(5); 29 U.S.C. § 623(i)(10).

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interest credits do not exceed a market rate of return. In general, the new provisions regarding

cash balance plans are effective for periods beginning on or after June 29, 2005. Thus, cash

balance plans in existence prior to this date may still be subject to legal challenge. 67

E. Minimum Vesting Standards

While benefit accrual refers to the amount of benefits earned under ERISA, vesting occurs when

a plan participant’s accrued benefit is considered to be nonforfeitable.68 Once benefits have

vested, the participant may be able to receive the vested portion of his or her retirement benefits

even if he or she leaves the job before retirement. Vesting requirements apply only to benefits

derived from employer contributions to a plan. Participant contributions to a pension plan must be

automatically nonforfeitable to the participant.69

ERISA imposes two general vesting requirements: one depending on age and one depending on

length of service. First, under Section 203(a) of ERISA, all plans must provide that the

employees’ rights to their “normal retirement benefits”70 are fully vested upon attainment of

“normal retirement age.”71 While a plan may choose a “normal retirement age” for purposes of

determining when a participant’s benefits vest, ERISA provides that this age must be the earlier

of: (1) the time a participant attains normal retirement age as specified under a plan or (2) the

later of the time the participant attains age 65 or the fifth anniversary of the time the participant

commenced participation in the plan. 72

Second, ERISA’s vesting provisions also require benefits to vest based on an employee’s years of

service to the employer. Under ERISA § 203(b), a qualified defined benefit plan must meet one of

two vesting schedules. 73 The first schedule is met if a participant’s benefits are fully vested after

five years of service, commonly referred to as five-year “cliff” vesting. Alternatively, a

participant’s benefits may vest under the following graded vesting schedule: 74

For more information on this issue, see CRS Report RL33004, Cash Balance Pension Plans and Claims of Age

Discrimination, by Jennifer Staman and (name redacted).

There can be confusion in understanding the difference between when benefits accrue and when benefits vest. As

articulated by the Supreme Court, accrual is “the rate at which an employee earns benefits to put in his pension

account.” Central Laborers’ Pension Fund v. Heinz, 541 U.S. 739, 749 (2004). Vesting, on the other hand, is “the

process by which an employee’s already-accrued pension account becomes irrevocably his property.” Id.

Parallel vesting provisions may be found in Internal Revenue Code § 411.

“Normal retirement benefit,” as defined by Section 3(22) of ERISA, means the greater of an early retirement benefit

offered under the plan or the benefit under the plan commencing at normal retirement age.

While normal retirement age under a plan can be a specific age, it also may include service requirements (e.g., 55

years old with at least five years of service). See also 26 U.S.C. § 411(a)(8).

ERISA § 3(24), 29 U.S.C. § 1002(24). It should also be noted that the Treasury Department has recently issued

regulations regarding distributions from a qualified pension plan upon attainment of normal retirement age. See 72 Fed.

Reg. 28604 (May 22, 2007), 26 C.F.R. § 1.401(a)-1(b).

29 U.S.C. § 1053.

ERISA § 203(a)(2)(A); 29 U.S.C. § 1053(a)(2)(A). See ERISA § 203(b); 29 U.S.C. § 1053(b), for requirements

relating to computing a participant’s period of service. This section provides that in computing the period of service for

purposes of the vesting requirement, all years of service must be taken into account, subject to certain exceptions and

limitations.

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Years of service75

Vesting percentage

20%

40%

60%

80%

100%

Most defined contribution plans are subject to similar vesting requirements. Exceptions include

the SIMPLE 401(k) and the Safe Harbor 401(k) plans, in which participants are immediately

vested in employer contributions. For other defined contribution plans, employers have a choice

between two vesting schedules for employer contributions.76 Under cliff vesting, participants

must be 100% vested in employer contributions after no more than three years of service. Under

graduated or graded vesting, an employee must be at least 20% vested after two years, 40% after

three years, 60% after four years, 80% after five years, and 100% vested after six years. Both

employer matching contributions (i.e., employer plan contributions made on behalf of an

employee and on account of an employee’s elective contributions)77 as well as employer

nonelective contributions (such as profit-sharing contributions) must vest under these rules.

Breaks in Service

ERISA protects plan participants from losing credit for earlier service in cases in which workers

leave their jobs and then return to work within five years.78 Once an employee becomes eligible

to participate in a pension plan, all years of service with the employer during which the employer

maintained the plan (including service before becoming a plan participant) must be taken into

account for purposes of determining how much service will be counted toward meeting the plan’s

vesting requirement. In the case of a nonvested participant, years of service before any break in

service must be taken into account upon re-employment. In a defined contribution plan, if a

participant who is not 100% vested incurs a break in service of less than five years and

subsequently returns to work, all service after returning to work must be added to the pre-break

service in determining the vested portion of the pre-break benefit. A break in service occurs in

any year in which the employee completes less than 500 hours of service. Generally, workers will

not incur a break in service for up to one year’s absence due to pregnancy, childbirth, infant care,

or adoption.79

F. Benefit Protections for Spouses

The Retirement Equity Act of 1984 (REA)80 amended ERISA to increase pension protections for

the survivors of deceased plan participants. As amended by the REA, ERISA requires defined

A year of service means a consecutive 12 month period during which a participant has completed 1,000 hours of

service.

ERISA § 203(a)(2)(B), 29 U.S.C. § 1053(a)(2)(B).

See 26 U.S.C. § 401(m)(4).

ERISA § 203(b), 29 U.S.C. § 1053(b).

ERISA § 203(b)(3)(E), 29 U.S.C. § 1053(b)(3)(E).

P.L. 98-397, 98 Stat. 1451 (1984).

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benefit plans and money purchase plans to provide preretirement and postretirement survivor

annuities to married employees unless a written election to waive the survivor annuity is signed

by both the employee and his or her spouse. 81 In the event of divorce, ERISA requires plan

administrators to honor qualified domestic relations orders (QDROs) issued by state courts that

divide the pension or account balance between the two parties. 82 This requirement ensures that a

court order awarding a share of a vested pension benefit to the former spouse of a divorced plan

participant will be honored by the plan.

1. Preretirement Survivor Benefits

ERISA requires defined benefit plans to provide a survivor annuity to the spouse of a vested

active participant or vested former participant. The cost of the preretirement survivor annuity may

be paid by the employer or passed on to covered participants through reduced benefits or

increased contributions. To waive the preretirement survivor benefit, both participant and spouse

must sign a waiver form. The plan can defer payment of the survivor annuity until the month in

which the deceased participant would have reached the plan’s earliest retirement age. Profitsharing plans (including 401(k) plans) and stock bonus plans must provide for automatic payment

of the participant’s vested account balance to his or her spouse upon the death of the participant

unless both parties designate an alternate beneficiary in writing. If either a profit-sharing plan or

stock bonus plan offers a life annuity option, it must provide a pre-retirement survivor annuity.

2. Postretirement Survivor Benefits

ERISA requires the default form of benefit paid to a married participant in a defined benefit plan

to be a joint and survivor annuity that provides a life annuity to the survivor equal to at least 50%

of the joint benefit paid while the participant was living. Beginning in 2008, the PPA requires

plans to offer a 75% survivor annuity option if the plan’s survivor annuity is less than 75%, and to

offer a 50% survivor annuity option if the plan’s survivor annuity is greater than 75%.83 Waiving

the survivor benefit requires the written consent of both the participant and spouse. The

participant and spouse must have at least 90 days ending on the annuity starting date to waive the

survivor annuity. The decision to waive the survivor annuity also can be revoked during this

period.

Because a joint and survivor annuity is based on the joint life expectancy of the participant and

spouse instead of a single life, the amount of the joint annuity is lower than it would be if it were

a single-life annuity. Once a joint and survivor annuity is in effect and the retirement annuity has

commenced, the spouse to whom the participant was married on the date that the annuity started

is entitled to the survivor annuity, even if the couple is no longer married when the participant

dies.

Before the annuity begins, the employer must provide each participant with a written notice that

states:

ERISA § 205, 29 U.S.C. § 1055, and 26 U.S.C. § 417. Payment to a married participant in a DB plan of a single-life

annuity or a lump sum requires the spouse’s written consent.

ERISA § 206, 29 U.S.C. § 1056.

ERISA § 205(d), 29 U.S.C. § 1055(d), as amended by Section 1004 of the PPA.

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•

the terms and conditions of the qualified joint and survivor annuity;

•

the right of the participant and spouse to decline the survivor annuity and the

effect of the decision;

•

the rights of the spouse; and

•

the right to reverse the decision and the effect of reversing it.

3. Qualified Domestic Relations Orders

The REA of 1984 amended ERISA to allow plans to honor state court orders awarding a share of

a worker’s pension to a former spouse. 84 ERISA sets forth procedures the plan administrator must

follow to determine if a court order is a qualified domestic relations order (QDRO). While

ERISA generally requires pension plans to provide that “benefits under the plan may not be

assigned or alienated,” an exception to this requirement is made for QDROs.85 Payments to the

former spouse of a participant may begin when the participant becomes eligible to retire, even if

the participant is still employed.

A QDRO must specify:

•

the name and last known address of the participant and each person to receive

money,

•

the amount or percentage of the participant’s benefits to be paid to each person,

•

the number of payments or the time period to which the order applies, and

•

each plan to which the order relates.

A QDRO generally will qualify only if it does not require the plan to:

•

provide a form of benefit not otherwise provided by the plan,

•

pay more benefits than it would have paid in the absence of the order, or

•

pay benefits that the plan must already pay to another beneficiary because of an

earlier QDRO.

The PPA directed the Secretary of Labor to issue regulations to clarify whether a domestic

relations order that supersedes or revises an earlier QDRO will be considered to be qualified, and

to state the conditions under which a QDRO will not be treated as qualified because of the time at

which it was issued.86

G. Buyouts, Mergers, and Consolidations

If a company is purchased by another firm, participants and beneficiaries in the acquired

company may not be denied pension benefits already earned, and PBGC insurance protections

continue to apply to those benefits. In the event of a plan merger, consolidation, or transfer of

ERISA § 206, 29 U.S.C. § 1056, as amended by § 104 of the REA of 1984.

ERISA § 206(d)(3), 29 U.S.C. § 1056(d)(3).

§1001 of the PPA.

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plan assets or liabilities, the participant’s benefit must be equal to, or greater than, the benefit to

which the participant would have been entitled had the plan been terminated immediately before

the merger, consolidation, or transfer.87

H. Plan Funding

To ensure that sufficient money is available to pay promised pension benefits to participants and

beneficiaries, ERISA sets rules that require plan sponsors to fully fund the pension liabilities of

defined benefit plans. 88 These rules were substantially modified by the PPA. The funding

requirements of ERISA recognize that pension liabilities are long-term liabilities. Consequently,

plan liabilities need not be funded immediately, but instead can be amortized (paid off with

interest) over a period of years. Single-employer plans generally are required to amortize initial

past service liabilities and past service liabilities arising under plan amendments over no more

than seven years. Defined contribution plans do not promise a specific benefit, and so these plans

have no funding requirements.

ERISA requires employers that sponsor defined benefit plans to fund the pension benefits that

plan participants earn each year. This is referred to as funding the normal cost of the plan. In

addition, DB plan sponsors must amortize the cost of any pension benefits granted to employees

for past service, but for which no monies were set aside. Furthermore, if a DB plan retroactively

increases the level of benefits by plan amendment, these new liabilities must be amortized as

well. The assets of the pension plan must be kept in a trust that is separate from the employer’s

general assets. Assets in the pension trust fund are protected from the claims of creditors in the

event that the plan sponsor files for bankruptcy.

1. Funding Requirements for Single-employer Plans

ERISA requires companies that sponsor defined benefit pension plans to fully fund the benefits

that plan participants earn each year. If a plan is underfunded, the plan sponsor must amortize this

unfunded liability over a period of years. The PPA established new rules for determining whether

a defined benefit plan is fully funded, the contribution needed to fund the benefits that plan

participants will earn in the current year, and the contribution to the plan that is required if

previously earned benefits are not fully funded. In general, the new rules are effective with plan

years beginning in 2008, but many provisions of the PPA will be phased in over several years.

a. Minimum funding standards for single-employer plans

Pension plan liabilities extend many years into the future. Determining whether a pension is

adequately funded requires converting the future stream of pension payments into the amount that

would be needed today to pay off those liabilities all at once. This amount—the “present value”

of the plan’s liabilities—is then compared with the value of the plan’s assets. An underfunded

plan is one in which the value of the plan’s assets falls short of the present value of its liabilities.

Converting a future stream of payments (or income) into a present value requires the future

ERISA § 208, 29 U.S.C. § 1058.

ERISA §§302 through 308 govern funding of defined benefit pension plans. (Also see 26 U.S.C. § 412, §430, §431,

and §432.) Funding requirements for single-employer plans were amended by §§101 to 116 of the PPA. Funding

requirements for multiemployer DB plans were amended by §§201 to 221 of the PPA.

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payments (or income) to be discounted using an appropriate interest rate. Other things being

equal, the higher the interest rate, the smaller the present value of the future payments (or

income), and vice versa.

When fully phased in, the new funding requirements established by the PPA will require plan

assets to be equal to 100% of plan liabilities. Any unfunded liability will have to be amortized

over no more than seven years. Sponsors of severely underfunded plans that are at risk of

defaulting on their obligations will be required to fund their plans according to special rules that

will result in higher employer contributions to the plan. Plan sponsors are allowed to use credit

earned for past contributions (called “credit balances”) to offset required contributions, but only if

the plan is funded at 80% or more. The value of credit balances must be adjusted to reflect

changes in the market value of plan assets since the date the contributions that created the credit

balances were made.

A plan sponsor’s minimum required contribution is based on the plan’s target normal cost and the

difference between the plan’s funding target and the value of the plan’s assets. The target normal

cost is the present value of all benefits that plan participants will accrue during the year. The

funding target is the present value of all benefits—including early retirement benefits—already

accrued by plan participants as of the beginning of the plan year. If a plan’s assets are less than

the funding target, the plan has an unfunded liability. This liability—less any permissible credit

balances—must be amortized in annual installments over no more than seven years. The plan

sponsor’s minimum required annual contribution is the plan’s target normal cost for the plan year,

but not less than zero. The 100% funding target is being phased in at 92% in 2008, 94% in 2009,

96% in 2010, and 100% in 2011 and later years.89 The phase-in does not apply to underfunded

plans that were required to make deficit reduction contributions in 2007.90 Those plans have a

100% funding target in 2008.

ERISA requires plans to discount future liabilities using three different interest rates, depending

on the length of time until the liabilities must be paid. 91 A short-term interest rate is used to

calculate the present value of liabilities that will come due within five years. A mid-term interest

rate is used for liabilities that will come due in five to 20 years, and a long-term interest rate is

applied to liabilities that will come due in more than 20 years. The Secretary of the Treasury

determines these rates, which are derived from a “yield curve” of investment-grade corporate

bonds averaged over the most recent 24 months. 92 The yield curve is being phased in over three

The PPA, through this transition rule, gave pension plans a three-year period to ease into the new plan funding

requirements, in which plans could gradually increase the value of the plan assets, thus relieving them from the burden

of having to contribute a large part of the funding shortfall in one year. The PPA, however, placed a limitation on this

transition rule, under which the rule will not apply with respect to any plan year after 2008 unless the shortfall

amortization base was zero (e.g., the plan failed to meet the transition rule, or be 92% funded in 2008). Section 202 of

the Worker, Retiree, and Employer Recovery Act (WRERA), enacted in December 2008, allows plans to follow the

transition rule even if the plan’s shortfall amortization base was not zero in the preceding year. 29 U.S.C. § 1083(c)(5);

26 U.S.C. § 430(c)(5). Thus, a plan that was not 92% funded in 2008 would only be required to be 94% funded in

2009, instead of 100%. This provision gives plans some additional time to be 100 percent funded, a requirement that

may have become more difficult to fulfill because of the decline in the financial markets and the resulting loss of value

of plan assets.

Deficit reduction contributions (DRCs) were additional contributions required of underfunded plans prior to

enactment of the PPA. The PPA eliminated DRCs after 2007.

ERISA § 303, 29 U.S.C. § 1083, as amended by §102 of the PPA.

A yield curve is a graph that shows interest rates on bonds plotted against the maturity date of the bond. Normally,

long-term bonds have higher yields than short-term bonds because both credit risk and inflation risk rise as the maturity

(continued...)

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years beginning in 2007. It will replace the four-year average of corporate bond rates established

under the Pension Funding Equity Act of 2004,93 which expired on December 31, 2005.94

b. “At risk” plans

Pension plans that are determined to be at risk of defaulting on their liabilities must use specific

actuarial assumptions to determine plan liabilities.95 A plan is deemed to be at-risk if it is unable

to pass either of two tests. Under the first test, a plan is at-risk if it is less than 70% funded under

the “worst-case scenario” assumptions that (1) the employer is not permitted to use credit

balances to reduce its cash contribution and (2) employees will retire at the earliest possible date

and will choose to take the most expensive form of benefit. If a plan does not pass this test, it will

be deemed to be at-risk unless it is at least 80% funded under standard actuarial assumptions.

This latter test will be phased in over four years, with the minimum funding requirement starting

at 65% in 2008 and rising to 70% in 2009, 75% in 2010, and 80% in 2011. If a plan passes either

of these two tests, it is not deemed to be at-risk; however, it is required to make up its funding

shortfall over no more than seven years. Plans that have been at-risk for at least two of the

previous four years also will be subject to an additional “loading factor” equal to 4% of the plan’s

liabilities plus $700 per participant, which is added to the plan sponsor’s required contribution to

the plan. Plan years prior to 2008 will not count for this determination. Plans with 500 or fewer

participants in the preceding year are exempt from the at-risk funding requirements.

c. Mortality tables

To estimate a pension plan’s future obligations, the plan’s actuaries use mortality tables to project

the number of participants who will claim a pension and the average length of time that

participants and their surviving beneficiaries will receive pension payments. ERISA requires the

Secretary of the Treasury to prescribe the mortality tables to be used for these estimates.96 Large

plans can petition the IRS to use a plan-specific mortality table.

2. Valuation of Plan Assets

Prior to enactment of the PPA, a plan sponsor could determine the value of a plan’s assets using

actuarial valuations, which can differ from the current market value of those assets. For example,

in an actuarial valuation, the plan’s investment returns could be “smoothed” (averaged) over a

five-year period, and the average asset value could range from 80% to 120% of the fair market

value. Averaging asset values reduces volatility in the measurement of plan assets that can be

caused by year-to-year fluctuations in interest rates and the rate of return on investments.

Averaging therefore reduces the year-to-year volatility in the plan sponsor’s required minimum

contributions to the pension plan. The PPA narrowed the range for actuarial valuations to no less

than 90% and no more than 110% of fair market value and it reduced the maximum smoothing

(...continued)

dates extend further into the future. Consequently, the yield curve usually slopes upward from left to right.

P.L. 108-218, 118 Stat. 596 (Apr. 10, 2004).

The PPA extended the interest rates permissible under P.L. 108-218 through 2007 for purposes of the current liability

calculation.

ERISA § 303, 29 U.S.C. § 1083, as amended by §102 of the PPA.

ERISA § 303, 29 U.S.C. §1083 as amended by §102 of the PPA.

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period to two years. Plans with more than 100 participants are required to use the first day of the

plan year as the basis for calculations of plan assets and liabilities. Plans with 100 or fewer

participants can choose another date.

Plan contributions and credit balances

Within limits, plan sponsors can offset required current contributions with previous contributions.

However, these so-called “credit balances” can be used to reduce the plan sponsor’s minimum

required contribution to the plan only if the plan’s assets are at least 80% of the funding target,

not counting prefunding balances that have arisen since the PPA became effective. 97 Existing

credit balances and new prefunding balances must both be subtracted from assets in determining

the “adjusted funding target attainment” percentage that is used to determine whether certain

benefits can be paid and whether benefit increases are allowed. Credit balances also have to be

adjusted for investment gains and losses since the date of the original contribution that created the

credit balance. Credit balances must be separated into balances carried over from 2007 and

balances resulting from contributions in 2008 and later years.

3. Benefit Limitations in Underfunded Plans

ERISA places limits on (1) plan amendments that would increase benefits, (2) benefit accruals,

and (3) benefit distribution options (such as lump sums) in single-employer defined benefit plans

that fail to meet specific funding thresholds.98

a. Shutdown Benefits

Shutdown benefits are payments made to employees when a plant or factory is shut down. These

benefits typically are negotiated between employers and labor unions, and usually they are not

prefunded. ERISA prohibits shut-down benefits and other “contingent event benefits” from being

paid by pension plans that are funded at less than 60% of full funding unless the employer makes

a prescribed additional contribution to the plan. The PBGC guarantee for such benefits is phased

in over a five-year period commencing when the event occurs.99

b. Restrictions on benefit accruals

ERISA requires benefit accruals to cease in plans funded at less than 60% of full funding. Once a

plan is funded above 60%, the employer—and the union in a collectively bargained plan—must

decide how to credit past service accruals. This provision does not apply if the employer makes

an additional contribution prescribed by statute. However, Section 203 of WRERA provides that

for the first plan year beginning during the period of October 1, 2008, through September 30,

2009, this restriction on benefit accruals is determined using the funding levels from the

A credit balance in a plan at the end of the 2007 plan year is referred to as a “carryover balance.” A credit balance

created after 2007 is referred to as a “prefunding balance.”

ERISA § 206, 29 U.S.C. § 1056 as amended by §103 of the PPA.

In 2004, the 6th Circuit Court of Appeals ruled that the PBGC could set a plan termination date that would prevent

the agency from being liable for shutdown benefits. PBGC v. Republic Technologies International, LLC, et al., 386

F.3d 659 (6th Cir. 2004). In March 2005, the Supreme Court declined to hear the case, leaving the Circuit Court’s

decision in place.

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preceding year, instead of the current year, if the funding levels for the preceding year are greater.

Thus, for plans that have lost a lot in the value of plan assets, looking to the funding levels for the

previous year may allow some plans to continue providing future benefit accruals that would

otherwise have to cease them.

c. Restrictions on benefit increases

Plan amendments that increase benefits are prohibited if the plan is funded at less than 80% of the

full funding level, unless the employer makes additional contributions to fully fund the new

benefits. Benefit increases include—but are not limited to—increases in the rate of benefit accrual

and increasing the rate at which benefits become vested.

d. Restrictions on lump-sum distributions

Lump-sum distributions are prohibited if the plan is funded at less than 60% of the full funding

level or if the plan sponsor is in bankruptcy and the plan is less than 100% funded.100 If the plan is

funded at more than 60% but less than 80%, the plan may distribute as a lump sum no more than

half of the participant’s accrued benefit.

e. Notice to participants

ERISA requires plan sponsors to notify participants of restrictions on shutdown benefits, lumpsum distributions, or suspension of benefit accruals within 30 days of the plan being subject to

any of these restrictions. The restrictions on benefits in underfunded plans are effective in 2008,

but not before 2010, for collectively bargained plans.

4. Lump-sum Distributions

ERISA requires defined benefit pensions to offer participants the option to receive their accrued

benefit as a life annuity: a series of monthly payments guaranteed for life. Many defined benefit

plans also offer participants the option to take their accrued benefit as a lump sum at the time they

separate from the employer. The amount of a lump-sum distribution from a defined benefit

pension is inversely related to the interest rate used to calculate the present value of the benefit

that has been accrued under the plan: the higher the interest rate, the smaller the lump sum and

vice versa. To protect employees’ accrued benefits, ERISA prescribes interest rates and mortality

tables to be used in determining the minimum value of a participant’s benefit expressed as a lump

sum. Before the PPA, minimum lump-sum values were calculated using the interest rate on 30year Treasury bonds. As amended by the PPA, ERISA requires lump-sum payments from defined

benefit plans to be no less than the amount that would result from using the applicable corporate

bond interest rate.101 It requires plans that use an interest rate that results in larger lump sums to

treat these larger payments as a subsidy to plan participants, which must be funded by the plan

sponsor. The new rules for lump sums are being phased in over five years, beginning in 2008.

100

However, lump-sum payments of $5,000 or less may be paid by an underfunded plan that is otherwise precluded

from paying larger lump-sum distributions. See 29 U.S.C. § 1056(g)(3)(E); 26 U.S.C. § 436(d)(5), as amended by

Section 101 of WRERA.

101

ERISA § 205(g), 26 U.S.C. § 417(e), as amended by § 302 of the PPA.

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When fully phased in, minimum permissible lump-sum distributions will be based on a threesegment interest rate yield curve, derived from the rates of return on investment-grade corporate

bonds of varying maturities. Plan participants of different ages will have their lump-sum

distributions calculated using different interest rates. Other things being equal, a lump-sum

distribution paid to a worker who is near the plan’s normal retirement age will be calculated using

a lower interest rate than will be used for a younger worker. As a result, all else being equal, an

older worker will receive a larger lump sum than a similarly situated younger worker. The interest

rates used to calculate lump sums will be based on current bond rates rather than the three-year

weighted average rate used to calculate the plan’s funding target. Plans funded at less than 60%

are prohibited from paying lump-sum distributions. Plans funded at 60% to 80% can pay no more

than half of a participant’s accrued benefit as a lump-sum distribution.

The PPA also established a new interest rate floor for testing whether a lump sum paid from a

defined benefit plan complies with the benefit limitations under IRC §415(b).102 In general, IRC

§415(b) limits the annual single-life annuity payable from a qualified defined benefit plan to the

lesser of 100% of average compensation over three years or $195,000 (in 2009). A benefit paid as

a lump sum must be converted to an equivalent annuity value for purposes of applying this limit.

As amended by the PPA, ERISA requires plans making this calculation to use an interest rate that

is no lower than the highest of (1) 5.5%, (2) the rate that results in a benefit of no more than

105% of the benefit that would be provided if the interest rate required for determining a lump

sum distribution were used, or (3) the interest rate specified in the plan documents.103

5. Funding Requirements for Multiemployer Plans

A multiemployer plan is a collectively bargained plan maintained by several employers—usually

within the same industry—and a labor union. Multiemployer defined benefit plans are subject to

funding requirements that differ from those for single-employer plans. The PPA established a new

set of rules for improving the funding of multiemployer plans that the law defines as being in

“endangered” or “critical” status.104 These new requirements will remain in effect through 2014.

As amended by the PPA, ERISA requires each multiemployer plan to certify the plan’s current

funding status and project its funding status for the following six years within 90 days after the

start of the plan year. If the plan is underfunded, it has 30 days after the certification date to notify

participants and eight months to develop a funding schedule that meets the statutory funding

requirements and to present it to the parties of the plan’s collective bargaining agreement.

Multiemployer plans must amortize any increases in plan liabilities that are due to benefit

increases or to changes in the actuarial assumptions used by the plan over a period of 15 years.

The PPA increased the limit on tax-deductible employer contributions to multiemployer plans to

140% of the plan’s current liability (up from 100%), and it eliminated the 25%-of-compensation

combined limit on contributions to defined benefit and defined contribution plans. The PPA also

allows the Internal Revenue Service to permit multiemployer plans that project a funding

deficiency within ten years to extend the amortization schedule for paying off its liabilities by

102

IRC §415 sets limitations on benefits and contributions in qualified plans.

103

For more detailed information of the effect of the PPA on lump-sums, see CRS Report RS22765, Lump-Sum

Distributions Under the Pension Protection Act, by (name redacted).

104

Funding requirements for multiemployer plans were amended by §§201-221 of the PPA.

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five years, with a further five-year extension permissible. It requires the plans to adopt a recovery

plan and to use specific interest rates for plan funding calculations.

a. Requirements for underfunded multiemployer plans

The PPA established mandatory procedures, effective through 2014, to improve the funding of

seriously underfunded multiemployer plans. A multiemployer plan is considered to be

endangered if it is less than 80% funded or if the plan is projected to have a funding deficiency

within seven years. A plan that is less than 80% funded and is projected to have a funding

deficiency within seven years is considered to be seriously endangered. An endangered plan has

one year to implement a “funding improvement plan” designed to reduce the amount of underfunding. Endangered plans have 10 years to improve their funding. They must improve their

funding percentage by one-third of the difference between 100% funding and the plan’s funded

percentage from the earlier of (1) two years after the adoption of the funding improvement plan or

(2) the first plan year after the expiration of collective bargaining agreements that cover at least

75% of the plan’s active participants.

Seriously endangered plans that are less than 70% funded have 15 years to improve their funding.

They must improve their funding percentage by one-fifth of the difference between 100% funding

and the plan’s funded percentage from the earlier of (1) two years after the adoption of the

funding improvement plan or (2) the first plan year after the expiration of collective bargaining

agreements that cover at least 75% of the plan’s active participants. A plan that is endangered or

seriously endangered may not increase benefits. If the parties to the collective bargaining

agreement are not able to agree on a funding improvement plan, a default funding schedule

applies that will reduce future benefit accruals. A multiemployer plan is not endangered in any

plan year in which the required funding percentages are met.

A multiemployer plan is considered to be in critical status if (1) it is less than 65% funded and it

has a projected funding deficiency within five years or will be unable to pay benefits within seven

years; (2) it has a projected funding deficiency within four years or will be unable to pay benefits

within five years (regardless of its funded percentage); or (3) its liabilities for inactive participants

are greater than its liabilities for active participants, its contributions are less than carrying costs,

and a funding deficiency is projected within five years. A plan in critical status has one year to

develop a rehabilitation plan designed to reduce the amount of underfunding. 105

b. Reductions in adjustable benefits

In general, ERISA’s anti-cutback rule prohibits reductions in accrued, vested benefits. The PPA

relaxed the anti-cutback rule so that multiemployer plans in critical status are permitted to reduce

or eliminate early retirement subsidies and other “adjustable benefits” to help improve their

funding status if this is agreed to by the bargaining parties. Benefits payable at normal retirement

age cannot be reduced, and plans are not permitted to cut any benefits of participants who retired

before they were notified that the plan is in critical status. Adjustable benefits include certain

105

WRERA provides temporary relief from the multi-employer plan funding rules created by the PPA. For example,

under Section 204 of WRERA, a sponsor of a multiemployer defined benefit pension plan may elect for the status of

the plan year that begins during the period between October 1, 2008, and September 30, 2009, to be the same as the

plan’s certified status for the previous year. Accordingly, if a plan was not in endangered or critical status for the prior

year, the sponsor may elect to retain this status and may avoid additional plan funding requirements.

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optional forms of benefit payment, disability benefits, early retirement benefits, joint and survivor

annuities (if the survivor benefit exceeds 50%), and benefit increases adopted or effective less

than five years before the plan entered critical status.

c. Disclosure requirements

As amended by the PPA, ERISA requires multiemployer plans to send funding notices to

participants within 120 days after the end of the plan year. The Department of Labor will post

information from plans’ annual reports on its website, and plans are required to provide certain

information to participants on request. For plans in endangered or critical status, the plan actuary

must certify that the funding improvement is on schedule. Annual reports must contain

information on funding improvement plans or rehabilitation plans. Notification must be provided

to participants, beneficiaries, bargaining parties, the PBGC, and the Secretary of Labor within 30

days after the plan determines that it is in endangered or critical status.

I. Fiduciary Responsibility

ERISA imposes certain obligations on plan fiduciaries, persons who are generally responsible for

the management and operation of employee benefit plans. ERISA Section 3(21)(A) provides that

a person is a “fiduciary” to the extent that the person: (1) exercises any discretionary authority or

control with respect to the management of the plan or exercises any authority with respect to the

management or disposition of plan assets; (2) renders investment advice for a fee or other

compensation with respect to any plan asset or has any authority or responsibility to do so;106 or

(3) has any discretionary responsibility in the administration of the plan. 107 Every plan governed

by ERISA must have one or more named fiduciaries, and these fiduciaries must be named in the

plan document. 108 Section 404(a)(1) of ERISA establishes the duties owed by a fiduciary to

participants and beneficiaries of a plan. This section identifies four standards of conduct: (1) a

duty of loyalty, (2) a duty of prudence, (3) a duty to diversify investments, and (4) a duty to

follow plan documents to the extent that they comply with ERISA. 109

1. Duty of Loyalty

Section 404(a)(1)(A) of ERISA requires plan fiduciaries to discharge their duties “solely in the

interest of the participants and beneficiaries” and for the “exclusive purpose” of providing

benefits to participants and beneficiaries and defraying reasonable expenses of administering the

plan.110 The duty of loyalty applies in situations where the fiduciary is confronted with a potential

106

See 29 C.F.R. § 2510.3-21, which provides guidance as to when a person shall be deemed to be rendering

investment advice to an employee benefit plan.

107

Plan fiduciaries may include plan trustees, plan administrators, and a plan’s investment managers or advisors. See

Department of Labor, Fiduciary Responsibilities, available at https://www.dol.gov/dol/topic/retirement/

fiduciaryresp.htm#doltopics.

108

ERISA § 402(a), 29 U.S.C. § 1102(a).

109

ERISA § 404(a)(1), 29 U.S.C. § 1104(a)(1).

110

This section is supplemented by Section 403(c)(1) of ERISA, which provides that the “assets of a plan shall never

inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits ... and defraying

reasonable expenses of administering the plan.” 29 U.S.C. § 1103(c)(1).

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conflict of interest, for instance, when a pension plan trustee has responsibilities to both the plan

and the entity (such as the employer or union) sponsoring the plan.111

However, just because an ERISA fiduciary engages in a transaction that incidentally benefits the

fiduciary or a third party does not necessarily mean that a fiduciary breach has occurred. 112 One

case to address this idea is Donovan v. Bierwirth, a case under which pension plan trustees, who

were also corporate officers, were responsible for deciding whether they should tender shares of

company stock in order to thwart a hostile takeover attempt.113 The trustees not only decided

against tendering the stock, but also decided to purchase additional company stock for the

pension plan. In finding that the trustees had breached their fiduciary duties, the court in Donovan

noted that it is not a breach of fiduciary duty if a trustee who, after careful and impartial

investigation, makes a decision that while benefitting the plan, also incidentally benefits the

corporation, or the fiduciaries themselves. However, fiduciary decisions must be made with an

“eye single to the interests of the participants and beneficiaries.”114 The court articulated that the

trustees have a duty to “avoid placing themselves in a position where their acts as officers and

directors of the corporation will prevent their functioning with the complete loyalty to

participants demanded of them as trustees of a pension plan.”115

In addition to providing benefits, a plan fiduciary must “defray[] reasonable expenses of

administering the plan.”116 The Department of Labor has stated that “in choosing among potential

service providers, as well as in monitoring and deciding whether to retain a service provider, the

trustees must objectively assess the qualifications of the service provider, the quality of the work

product, and the reasonableness of the fees charged in light of the services provided.”117

On November 16, 2007, the Department of Labor issued a final regulation that revises the Form

5500, which plans file each year to report their funding status and other financial information that

ERISA requires to be disclosed to the Department. The regulation will require disclosure of

information regarding the fees paid by the plan to administrators, record keepers, and other

service providers.118 On December 13, 2007, the Department of Labor published a proposed

regulation that would require service providers to disclose to plan fiduciaries, in advance of

entering into a contract with the plan, all fees and any other direct or indirect compensation that

the service provider would receive while under contract to the plan.119

2. Duty of Prudence

Section 404(a)(1)(B) of ERISA requires fiduciaries to act “with the care, skill, prudence, and

diligence under the circumstances then prevailing that a prudent man would use in the conduct of

111

Craig C. Martin & Elizabeth L. Fine, ERISA Stock Drop Cases: An Evolving Standard, 38 J. Marshall L. Rev. 889

(2005).

112

Id.

113

680 F.2d 263 ( 2nd Cir. 1982).

114

680 F.2d at 271.

115

Id.

116

ERISA § 404(a)(1)(A)(ii), 29 U.S.C. § 1104(a)(1)(A)(ii).

117

U.S. Department of Labor, Employee Benefits Security Administration, Information Letter, July 28, 1998.

http://www.dol.gov/ebsa/regs/ILs/il072898.html.

118

72 Fed. Reg. 64731 (Nov. 16, 2007).

119

72 Fed. Reg. 70988 (Dec. 13, 2007).

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an enterprise of a like character with like aims.”120 When examining whether a fiduciary has

violated the duty of prudence, courts typically examine the process that a fiduciary undertook in

reaching a decision involving plan assets.121 If a fiduciary has taken the appropriate procedural

steps, the success or failure of an investment can be irrelevant to a duty of prudence inquiry.122

Regulations promulgated by the Department of Labor provide clarification as to the duty of

prudence in regard to investment decisions. These regulations indicate that a fiduciary can satisfy

his duty of prudence under ERISA by giving “appropriate consideration” to the facts and

circumstances that the fiduciary knows or should know are relevant to an investment or

investment course of action. 123 “Appropriate consideration” includes (1) “a determination by the

fiduciary that the particular investment or investment course of action is reasonably designed, as

part of the portfolio ... to further the purposes of the plan, taking into consideration the risk of loss

and the opportunity for gain (or other return) associated with the investment,” and (2)

consideration of the portfolio’s composition with regard to diversification, the liquidity and

current return of the portfolio relative to the anticipated cash flow requirements of the plan, and

the projected return of the portfolio relative to the plan’s funding objectives. 124

3. Duty to Diversify Investments

Section 404(a)(1)(C) of ERISA requires fiduciaries to diversify the investments of a plan “so as to

minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do

so.”125 In general, it is believed that fiduciaries should not invest an unreasonably large proportion

of a plan’s portfolio in a single security, in a single type of security, or in various securities

dependent upon the success of a single enterprise or upon conditions in a single locality.126

Courts have agreed that ERISA Section 404(a)(1)(C) does not create a diversification obligation

in terms of fixed criteria, but instead requires a determination based on the specific facts of each

individual case. 127 In GIW Industries, Inc. v. Trevor Stewart,128 the court concluded that the

defendant investment manager breached its duty to diversify investments by investing too heavily

in long-term government bonds. By investing 70 percent of the plan’s assets in long-term bonds

rather than short-term bonds, the firm exposed the fund to a greater degree of risk. Expert

testimony had indicated that short-term bonds or bonds with staggered maturity dates would have

120

29 U.S.C. § 1104(a)(1)(B).

See, e.g., GIW Industries v. Trevor, Stewart, Burton & Jacobsen, 895 F.2d 729 (11th Cir. 1990) (investment

management firm breached its duty of prudence after investing primarily in long-term, low risk government bonds and

failing to take into account the liquidity needs of the plan); Donovan v. Mazzola, 716 F.2d 1226, 1232 (9th Cir. 1983)

(court stated that test of prudence is whether “at the time they engaged in the challenged transactions, [fiduciaries]

employed the appropriate methods to investigate the merits of the investment and to structure the investment”).

122

See, e.g., Unisys, 74 F.3d at 434 (“[I]f at the time an investment is made, it is an investment a prudent person would

make, there is no liability if the investment later depreciates in value”).

123

See 29 C.F.R. § 2550.404a-1.

124

Id.

125

29 U.S.C. § 1104(a)(1)(C).

126

See generally, H.R. Rep. No. 1280 at 304 (1974), reprinted in 1974 U.S.C.C.A.N. 5085.

127

155 A.L.R. Fed. 349 (2007).

128

895 F.2d 729 (11th Cir. 1990).

121

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minimized exposure if the bonds were sold before maturity. The court maintained that Trevor

Stewart’s investment exposed the fund “to greater risk of cash outflows than was prudent.”129

Similarly, in Brock v. Citizens Bank of Clovis,130 the Tenth Circuit determined that trustees of the

Citizens Bank of Clovis Pension Plan breached their duty to diversify investments by investing

over 65 percent of the plan’s assets in commercial real estate mortgages. The court maintained

that the trustees’ significant investment in one type of security exposed the plan to a multitude of

risks. Moreover, the court found that the trustees failed to establish that the investments were

prudent notwithstanding the lack of diversification. However, in Metzler v. Graham,131 the court

found that a plan trustee had not breached his duty under Section 404(a)(1)(C), even though he

had invested more than half of the plan’s assets in one piece of real estate. While the court found

that the trustee had not diversified investments, the court concluded that the lack of

diversification of the plan’s investments was prudent under the facts and circumstances of the

case.132

4. Duty to Act in Accordance with Plan Documents

Section 404(a)(1)(D) of ERISA requires fiduciaries to discharge their duties “in accordance with

the documents and instruments governing the plan insofar as such documents and instruments are

consistent with [ERISA].”133 Courts have interpreted this section to apply not only to a document

or instrument that establishes a plan or maintains a plan, but also to other writings that have a

substantive effect on the plan. 134 These writings have included investment management

agreements, collective bargaining agreements, and even internal memoranda regarding the sale of

plan assets.135

Under Section 404(a)(1)(d), if a plan provision conflicts with ERISA, a fiduciary is obligated to

ignore the plan provision. 136 Courts have evaluated this requirement in the context of when

compliance with a plan provision leads to a breach of other fiduciary duties. The Department of

129

GIW Industries, 895 F.2d at 733.

841 F.2d 344 (10th Cir. 1988).

131

Metzler v. Graham, 112 F.3d 207 (5th Cir. 1997).

132

The court in Graham maintained that the trustee’s investment was prudent under the circumstances and thus, within

the exception in Section 404(a)(1)(C). The court identified four factors that supported the position that Graham did not

“imprudently introduce a risk of large loss by purchasing the Property.” Graham, 112 F.3d at 210. First, there was no

requirement that the plan make payments to beneficiaries until age 65, death, or disability, and the average age of the

plan participants was 37 when the property was purchased. Remaining plan assets were available to cover projected

payouts for the next twenty years. Second, the purchase was better insulated from the possible return of high inflation:

“when the plan’s holdings consisted solely of cash and short term instruments, there was little hedge against inflation.”

Id. at 211. Third, there was a significant cushion between the purchase price and the property’s appraised value.

Finally, the trustee’s expertise in the development of industrial property supported the conclusion that the investment

was prudent. After considering these factors, the court was persuaded that the investment did not carry a risk of large

loss.

133

29 U.S.C. § 1104(a)(1)(D).

134

See Employee Benefits Guide, Matthew Bender & Company, Inc. §24.15 (2007).

130

135

See George A. Norwood, Who Is Entitled to Receive a Deceased Participant’s ERISA Retirement Plan Benefits - an

Ex-Spouse or Current Spouse? The Federal Circuits Have an Irreconcilable Conflict, 33 Gonz. L. Rev. 61, 75 (19971998).

136

See, e.g., Cent. States v. Cent. Transp., 472 U.S. 559, 569 (1985)(stating that “trust documents cannot excuse

trustees from their duties under ERISA, and ... trust documents must generally be construed in light of ERISA’s

policies. [S]ee 29 U. S. C. § 1104(a)(1)(D)...”).

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Labor has argued that “if obeying a plan provision requires the fiduciary to act imprudently and

disloyally in violation of ERISA section 404(a)(1)(A) and (B) ... the provision is not consistent

with ERISA and the fiduciary has a duty to disregard it.”137 This situation was addressed in Tittle

v. Enron,138 in which the pension plan in question required employer contributions to be made

“primarily in Enron stock.” The court in Enron held that the plan fiduciaries had a duty to ignore

this provision if it would be imprudent to follow it.139

In interpreting Section 404(a)(1)(D), courts have also held that fiduciaries do not breach the duty

to act in accordance with plan documents if their failure to follow such documents results from

erroneous interpretations made in good faith. In Morgan v. Independent Drivers Association

Pension Plan,140 the Tenth Circuit found that the trustees of a pension plan did not violate Section

404(a)(1)(D) because their decision to terminate the plan based on an erroneous interpretation of

the effect of a new plan funding method was both considered in good faith and based on

consultation with experts.

5. Prohibited Transactions

In addition to requiring plan fiduciaries to adhere to certain standards of conduct, ERISA

prohibits fiduciaries from engaging in specified transactions deemed likely to injure a pension

plan.141 Engaging in a prohibited transaction is a per se violation of ERISA. Thus, in evaluating a

fiduciary’s role in a prohibited transaction, it may be considered irrelevant to examine whether

the transaction would be considered prudent had it occurred between independent parties.142

Section 406(a) of ERISA bars certain transactions between a plan and a party in interest143 with

respect to a plan. Subject to certain exemptions, 144 a fiduciary must not cause a plan to engage in

any transaction with a party in interest if the fiduciary knows or should know that the transaction

is a:

•

sale or exchange, or leasing, of any property;

•

lending of money or other extension of credit;

•

furnishing of goods, services, or facilities;

•

transfer or use of any plan assets; or

•

acquisition, on behalf of the plan, of any employer security or employer real

property in violation of ERISA § 407, which limits the amount of employer

securities and property that may be held by a plan.

137

Department of Labor Brief for Amicus, Nos. 04-1082, 03-155331 (4th Cir. 2004).

138

284 F. Supp. 2d 511, 2003 U.S. Dist. LEXIS 17492, 31 Employee Benefits Cas. (BNA) 2281 (S.D. Tex. 2003).

139

Id. at 669-70 (as cited in Department of Labor Brief for Amicus, Nos. 04-1082, 03-155331 (4th Cir. 2004)).

140

975 F.2d 1467(10th Cir. 1992).

141

Harris Trust and Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238 (2000). The Internal Revenue Code also

contains certain prohibited transaction provisions. See 26 U.S.C. § 4975.

142

See, e.g., Cutaiar v. Marshall, 590 F.2d 523 (3d Cir. 1979).

143

ERISA defines “party in interest” quite broadly to include a number of individuals who could affect a plan or its

fiduciaries. See ERISA § 3(14), 29 U.S.C. § 1002(14).

144

Exceptions to the prohibited transactions provisions may be found in Section 408 of ERISA (29 U.S.C. § 1108).

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Section 406(b) prohibits certain transactions between a plan and a plan fiduciary. A fiduciary may

not:

•

deal with the assets of the plan in his own interest or for his own account;

•

act in any transaction involving the plan on behalf of a party (or represent a

party) whose interests are adverse to the interests of the plan or the interests of its

participants or beneficiaries, or

•

receive any consideration for his own personal account from any party dealing

with such plan in connection with a transaction involving the assets of the plan. 145

ERISA also places a limit on the amount of investment in the sponsoring employer’s stock and

property held in a defined benefit plan. Section 407 generally provides that a plan may not invest

in securities of an employer unless they are “qualifying employer securities.”146 Further, under

this section, a plan may not acquire or hold employer real property unless it is “qualifying

employer real property.”147 However, a plan may not acquire qualifying employer securities or

qualifying employer property, if immediately after the acquisition, the aggregate fair market value

of employer securities and employer real property held by the plan is more than 10% of the fair

market value of the assets of the plan.

The Section 407 requirements generally do not apply to defined contribution plans, unless the

plan requires a portion of an elective deferral to be invested in qualifying employer securities or

qualifying employer real property.148 However, the PPA created new diversification requirements

for qualifying employer securities held in defined contribution plans. Section 204(j) of ERISA

provides that an individual must be allowed to elect to direct a plan to divest employee

contributions and elective deferrals invested in employer securities, and reinvest these amounts in

other investment options. 149 A plan must offer at least three investment options (besides employer

securities) to which an individual may direct the proceeds from the divestment. Individuals must

be allowed to diversify their employee contributions out of employer stock as often as other

investment changes are allowed, but at least quarterly. In addition, employees who have

completed three years of service must also be allowed to diversify employer matching

contributions and employer nonelective contributions out of employer stock. This requirement is

phased in over three years for existing amounts contributed in plan years before 2007.150 The

145

29 U.S.C. § 1106(b).

“Qualifying employer security,” as defined in Section 407(d)(5) (29 U.S.C. § 1107(d)(5)) means an employer

security which is (A) stock, (B) a marketable obligation (i.e., a bond, debenture, note, or certificate, or other evidence

of indebtedness, subject to certain acquisition requirements described in 407(e)), or (C) an interest in a publicly traded

partnership (as defined in Section 7704(b) of the Internal Revenue Code) if it is an “existing partnership.” See 26

U.S.C. § 7704 note. Qualifying employer securities may have to meet additional requirements. See ERISA §

407(d)(5)(C).

147

Property may be deemed “qualifying employer real property” under Section 407(d)(4) of ERISA (29 U.S.C. §

1107(d)(4)) if a substantial number of the parcels are dispersed geographically; each parcel of real property and the

improvements thereon are suitable (or adaptable without excessive cost) for more than one use; without regard to

whether all of such real property is leased to one lessee; and if the acquisition and retention of such property comply

with the provisions of ERISA (subject to certain exceptions).

148

See ERISA § 407(b)(1), 29 U.S.C. 407(b)(1), which is applicable to plans that require a portion of an elective

deferral to be used to acquire qualifying employer securities, qualifying real property, or both.

149

29 U.S.C. § 1054(j). The requirements of this section may not apply to certain defined contribution plans, including

certain ESOPs and one-participant plans (as defined in ERISA § 101(i)(8)(B), 29 U.S.C. § 1021(i)(8)(B)).

150

Thus, employer contributions acquired in a plan year before January 1, 2007, may be divested as follows: 33% in

(continued...)

146

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section also provides that, except as provided in regulations, plans cannot impose restrictions on

employer stock investment or diversification that are not imposed on other plan investments.

ERISA provides for various exemptions from the prohibited transactions provisions. Section

408(a) directs the Secretary of Labor to establish a procedure for granting administrative

exemptions for certain individuals and classes.151 The section provides that the Secretary may not

grant an exemption under this section unless it is (1) administratively feasible, (2) in the interests

of the plan and of its participants and beneficiaries, and (3) protective of the rights of participants

and beneficiaries of the plan. The Labor Department has promulgated regulations outlining the

procedures for filing and processing prohibited transaction exemption applications.152

Section 408(b) of ERISA provides a number of statutory exemptions. These exemptions, found in

Section 408(b), include certain loans to participants and beneficiaries (so long as certain

conditions are met);153 reasonable arrangements with parties in interest for office space or legal,

accounting, or other services needed for the establishment or operation of the plan; certain plan

investments (in the form of deposits) made in banks or in similar financial institutions whose

employees are covered by the plans; as well as the purchase of life insurance, health insurance, or

annuities from a qualifying insurer who is the employer maintaining the plan.

6. Investment Advice

Prior to the PPA, ERISA’s prohibited transaction restrictions were believed to have discouraged

the provision of investment advice. 154 Because it was perceived that “[v]irtually any transaction

could fall within one of these [prohibited transaction] categories,” individuals were reluctant to

provide investment advice to plan participants.155 The PPA amended both ERISA and the Internal

Revenue Code to add a statutory prohibited transaction exemption with regard to providing

investment advice. This exemption allows fiduciaries to provide investment advice without fear

of fiduciary liability under the prohibited transaction provisions.

Section 408(g)(1) of ERISA, as added by Section 601(a)(2) of the PPA, states that the act’s

prohibited transaction restrictions shall not apply to transactions involving investment advice if

such advice is provided by a fiduciary adviser pursuant to an “eligible investment advice

arrangement.” An “eligible investment advice arrangement” is defined as an arrangement that

either

(...continued)

the first plan year, 66% in the second year, and 100% in the third and following plan year. Participants who reached age

55 before the 2006 plan year are exempt from the phasing requirement.

151

ERISA, as originally enacted, provided for both the Department of Labor and Department of Treasury to issue

prohibited transactions exemptions. This was limited in 1979 by Reorganization Plan No. 4 of 1978 102(a), 43 Fed.

Reg. 47,713 (1978). Under this Reorganization Plan, the Treasury Department transferred almost all of its interpretive

and exemptive authority over the Internal Revenue Code’s prohibited transaction rules to the Department of Labor.

Currently, the Labor Department evaluates virtually all of the applications for administrative exemptions.

152

See 29 C.F.R. § 2570.30 et. seq.

153

ERISA § 408(b)(1), 29 U.S.C. § 1108.

154

See H.Rept. 107-262 pt. 1, at 12-13 (2001).

155

Id. at 12 (2001).

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(1) provides that any fees (including any commission or other compensation) received by the

fiduciary adviser for investment advice or with respect to the sale, holding, or acquisition of

any security or other property for purposes of investment of plan assets do not vary

depending on the basis of any investment option selected, or

(2) uses a computer model under an investment advice program meeting the requirements of

Section 408(g)(3) in connection with the provision of investment advice by a fiduciary

adviser to a participant or beneficiary.

To be considered an “eligible investment advice arrangement,” an arrangement must meet other

requirements identified in subsequent paragraphs of Section 408(g). These requirements include

the following: the express authorization of the arrangement by a plan fiduciary other than the

person offering the investment advice program, any person providing investment options under

the plan, or any affiliate of either; the performance of an annual audit of the arrangement by an

independent auditor; compliance with various disclosure requirements; the writing of participant

notifications in a clear and conspicuous manner; and the maintenance of any records showing

compliance with the relevant provisions of Section 408(g) for not less than six years. If

investment advice is provided through the use of a computer model, such model must also meet

certain specified requirements. 156

7. Fiduciary Duty and Participant-Controlled Investment

Under Section 404(c) of ERISA, if a defined contribution plan permits a participant or

beneficiary “to exercise control over the assets in his account,” a fiduciary will not be liable for

any loss which may result from the participant’s or beneficiary’s investment choices. However, in

order for a fiduciary to be immune from liability, a plan must meet certain requirements.157 Labor

Department regulations describe two basic requirements for a plan to be considered a “404(c)

plan.”158 First, a plan must provide the participant or beneficiary the opportunity to exercise

control over the assets in the individual’s account.159 Individuals must, among other things, have a

“reasonable opportunity to give investment instructions” as well as “the opportunity to obtain

sufficient information to make informed decisions” about investment alternatives under the

plan.160

156

See ERISA § 408(g)(3)(B), 29 U.S.C. § 1108(g)(3)(B). For additional information on Investment Advice under the

PPA, see CRS Report RS22514, Investment Advice and the Pension Protection Act of 2006, by (name redacted).

157

Under Section 404(c), plan fiduciaries are only shielded from liability for losses “which result from” a participant or

beneficiary’s investment choices. A 404(c) plan fiduciary still remains liable for other fiduciary obligations. For

example, a plan fiduciary still must select appropriate investment alternatives from which plan participants may choose,

and monitor the performance of these investments. The Department of Labor, in promulgating regulations for ERISA

§404(c), emphasized this point:

... the act of designating investment alternatives ... in an ERISA Section 404(c) plan is a fiduciary

function to which the limitation on liability provided by Section 404(c) is not applicable. All of the

fiduciary provisions of ERISA remain applicable to both the initial designation of investment

alternatives and investment managers and the ongoing determination that such alternatives and

managers remain suitable and prudent investment alternatives for the plan. Therefore, the particular

plan fiduciaries responsible for performing these functions must do so in accordance with ERISA.

57 Fed. Reg. 46906 (Oct. 13, 1992).

158

29 C.F.R. § 2550.404c-1. This section is hereinafter referred to as “the 404(c) regulations.”

159

29 C.F.R. § 2550.404c-1(b)(i).

160

29 C.F.R. § 2550.404c-1(b)(2)(B).

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Second, a plan must allow a participant or beneficiary to choose from a “broad range of

investment alternatives.”161 A participant or beneficiary is deemed to have access to this range of

alternatives if, among other things, the individual has the opportunity to “materially affect” the

potential return and the degree of risk on the portion of the individual account with respect to

which he is permitted to exercise control.162 In addition, a participant or beneficiary must be given

a choice of at least three investment alternatives, each of which is diversified, has different risk

and return characteristics, and which, in the aggregate, enable the participant to achieve a

portfolio with risk and return characteristics that are “normally appropriate” for the participant or

beneficiary.163

In addition, in order for a fiduciary to be immune from liability under Section 404(c), a

participant or beneficiary must not only have the ability to exercise control of plan assets, but

must also have taken the opportunity to “exercise independent control” with respect to the

investment of assets in the individual’s account. The 404(c) regulations provide guidance as to

when a participant or beneficiary will be deemed to have exercised control over plan assets,164 as

well as certain circumstances under which a participant or beneficiary’s exercise of control will

not be considered “independent.”165

8. Fiduciary Liability under ERISA Section 409

Plan fiduciaries may be personally liable if the fiduciary breaches a responsibility, duty, or

obligation under ERISA.166 Section 409 of ERISA provides that a fiduciary may be liable to a

plan for any losses resulting from such breach and may be responsible for forfeiting to the plan

any profits that have been made through the improper use of plan assets.167 Besides this monetary

relief available, a court may also award “equitable and remedial relief” as it deems appropriate.

In addition, Section 409(b) provides that a fiduciary is not liable with respect to a breach of

fiduciary duty “if such breach was committed before he became or after he ceased to be a

fiduciary.” Courts have found that fiduciaries are not liable for losses caused by an imprudent

investment made prior to when the individual assumed fiduciary responsibility.168 Still, a

161

29 C.F.R. § 2550.404c-1(b)(ii).

Id.

163

29 C.F.R. § 2550.404c-1(b)(3). Because employer stock is not a diversified investment, it cannot be one of the three

“core” investment options required by ERISA Section 404(c). See section I(I) supra for discussion of diversification

requirements on certain defined contribution plans that hold employer securities.

164

29 C.F.R. § 2550.404c-1(c)(1). The 404(c) regulations specify that a participant or beneficiary will be deemed to

have exercised control with respect to the exercise of voting, tender, and other rights related to an investment, provided

that the participant or beneficiary had a reasonable opportunity to exercise control in making the investment.

165

29 C.F.R. § 2550.404c-1(c)(2). Circumstances under which a participant or beneficiary’s control will not be

considered independent include situations where the individual is subject to improper influence by a plan fiduciary or

plan sponsor with respect to a transaction, or where a plan fiduciary has concealed “material non-public facts”

regarding the investment, unless such disclosure would violate federal or state law.

166

ERISA § 409, 29 U.S.C. § 1109. For a discussion of actions that may be brought under ERISA in the event of

fiduciary breach, see the “J. Administration and Enforcement” section infra.

167

29 U.S.C. § 1109. Section 409 works in conjunction with Section 502 of ERISA, ERISA’s primary civil

enforcement provision. See supra section I(I) on “I. Fiduciary Responsibility.” Section 502(a)(2) allows for a civil

action to be brought “by the Secretary, or by a participant, beneficiary, or fiduciary for appropriate relief under §409.”

168

EMPLOYEE BENEFITS LAW (Matthew Bender 2d ed.)(2000). (citing Aull v. Cavalcade, 988 F. Supp. 1360 (D. Colo.

1997); Davidson v. Cook, 567 F. Supp. 225 (E.D. Va. 1983), aff’d, 734 F.2d 10, (4th Cir. 1984), cert. denied, 469 U.S.

899 (1984)).

162

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fiduciary may have an obligation to rectify breaches of fiduciary duty committed by a previous

fiduciary and may be liable if he or she fails to take remedial action. 169

J. Administration and Enforcement

One of the primary goals in enacting ERISA was to “protect ... the interests of participants and ...

beneficiaries” of employee benefit plans, and assure that participants receive promised benefits

from their employers.170 To this end, ERISA “provid[es] for appropriate remedies, sanctions, and

ready access to the Federal courts.”171 ERISA contains an “integrated enforcement mechanism”172

that is also “essential to accomplish Congress’ purpose of creating a comprehensive statute for the

regulation of employee benefit plans.”173 An integral part of the civil enforcement scheme is

ERISA Section 502, which allows both private parties as well as government entities to bring

various civil actions to enforce provisions of ERISA.174

1. Civil Enforcement under Section 502(a)

Section 502(a) authorizes civil actions under ERISA as well as the remedies available to a

successful plaintiff. Civil actions under Section 502(a) include the following actions that may be

brought by a participant or a beneficiary, or, in some cases, a plan fiduciary or the Secretary of

Labor, to:

•

redress the failure of a plan administrator to provide information required by

ERISA’s reporting and disclosure requirements or COBRA requirements (Section

502(a)(1)(A));

•

recover benefits due to a participant or beneficiary under the terms of his plan, to

enforce his rights or to clarify his rights to future benefits under the terms of the

plan (Section 502(a)(1)(B));

•

receive appropriate relief due to breaches of fiduciary duty (Section 502(a)(2));

•

enjoin any act or practice which violates ERISA or the terms of the plan, as well

as to obtain other appropriate equitable relief to redress such violations (Section

502(a)(3));

169

See, e.g., Morrison v. Curran, 567 F. 2d 546 (2nd Cir. 1977)(court evaluated an improper use of plan assets made

prior to ERISA; court opined that “trustee’s obligation to dispose of improper investments within a reasonable time is

well established at common law” and that “ ERISA can hardly be read to eviscerate this duty”). See also McDougall v.

Donovan, 552 F. Supp. 1206, 1212 (D. Ill. 1982). But see Beauchem v. Rockford Prods. Corp., 2004 U.S. Dist. LEXIS

2091 (D. Ill. 2004)(In dismissing a claim against defendant co-fiduciaries, court stated that “[a]llowing a fiduciary to be

liable for failing to correct a breach committed by prior fiduciaries would destroy the protection of section [409](b)”).

While not addressed in this report, a fiduciary may also be responsible for an act of a co-fiduciary under Section 405 of

ERISA. This section contains various circumstances under which a fiduciary can be liable for a breach of responsibility

made by another fiduciary. 29 U.S.C. § 1105.

170

See ERISA § 2, 29 U.S.C. § 1001.

171

ERISA § 2(b), 29 U.S.C. § 1001(b). See also Aetna Health Inc. v. Davila, 542 U.S. 200, 208 (2004).

172

Russell, 473 U.S., at 147.

173

Aetna Health Inc. v. Davila, 542 U.S. at 208.

174

29 U.S.C. § 1132. ERISA’s enforcement scheme extends beyond civil actions. Other methods of enforcement

include tax disqualification and criminal sanctions.

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•

collect civil penalties (Section 502(a)(6)).175

The Supreme Court has found the enforcement scheme under Section 502(a) to contain

“exclusive” federal remedies. Accordingly, Section 502(a) may preempt state law under the

jurisdictional doctrine of “complete preemption.” As the Supreme Court has reasoned, Congress

may so completely preempt a particular area that “any civil complaint raising [a] select group of

claims is necessarily federal in character.”176 In other words, complete preemption can occur

“when Congress intends that a federal statute preempt a field of law so completely that state law

claims are considered to be converted into federal causes of action.”177 Under the doctrine of

complete preemption, a state claim that conflicts with a federal statutory scheme may be removed

to federal court.178 In the context of ERISA, if a state law claim is considered within the scope of

ERISA’s 502(a) civil enforcement provisions, the state law claim is completely preempted. Under

these circumstances, a plaintiff is limited to bringing a claim under Section 502 of ERISA and

may only receive the remedies available under the federal statute.179

Courts have frequently examined the scope of the remedies available under Section 502(a), in

light of preemption and other factors. Questions have arisen as to which plaintiffs are eligible to

bring a Section 502(a) claim and what remedies are available to them. The following discussion

addresses how the Supreme Court has evaluated various claims under Section 502.

2. Claims to Enforce Benefit Rights

Section 502(a)(1)(B) of ERISA authorizes a plaintiff (i.e., a participant or a beneficiary in an

ERISA plan) to bring an action against the plan to recover benefits under the terms of the plan, or

to enforce or clarify the plaintiff’s rights under the terms of the plan. Under this section, if a

plaintiff’s claim for benefits is improperly denied, the plaintiff may sue to recover the unpaid

benefit. A plaintiff may also seek a declaration to preserve a right to future benefits or an

injunction to prevent a future denial of benefits. 180

In terms of monetary remedies, Section 502(a)(1)(B) provides that a successful plaintiff may

receive the benefits the plaintiff would have been entitled to under the terms of the plan.

Compensatory or punitive damages are not available. In addition, as Section 502 of ERISA is

175

See Section 502(a) (29 U.S.C. 1132(a)) for additional civil actions authorized by ERISA. See 502(c)(29 U.S.C. §

1132(c)) for circumstances under which the Secretary of Labor may assess a civil penalty.

176

Metropolitan Life Insurance Co. v. Taylor, 481 U.S. 58, 63-4 (1987).

177

Gaming Corp. of Am. v. Dorsey & Whitney, 88 F.3d 536, 543 (8th Cir. 1996) (citing Taylor, 481 U.S. 58 at 65; Avco

Corp. v. Aero Lodge No. 735, Intern. Ass’n of Machinists and Aerospace Workers, 390 U.S. 557 (1968).

178

The procedure for determining whether a case will be moved from state court to federal court is governed by Section

1441(a) of the Federal Rules of Civil Procedure (FRCP). Under FRCP § 1441(a), any civil action brought in state court

may be removed to federal district court if the defendants can show that the federal district court has original

jurisdiction. 28 U.S.C. § 1441(a). Courts follow the “well-pleaded complaint rule,” which allows the plaintiff to

determine whether an action is heard in state or federal court. The plaintiff is able to choose his forum because “[i]t is

long settled law that a cause of action arises under federal law only when the plaintiff’s well-pleaded complaint raises

issues of federal law.” Taylor, 481 U.S. at 63. The fact that the defendant’s defense arises under federal law is not

enough to move the case to federal court. However, under the doctrine of complete preemption, a state claim may be

removed to federal court if Congress has completely preempted a particular area.

179

See section I(K) of this report for a broader discussion of preemption, including discussion of Section 514 of

ERISA, ERISA’s express preemption provision.

180

Jayne E. Zanglein, Susan J. Stabile, 31 JOURNAL OF PENSION PLANNING AND COMPLIANCE 1 (2005).

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Summary of the Employee Retirement Income Security Act (ERISA)

considered to contain “exclusive” federal remedies, Section 502(a)(1)(B) has been held to

preempt state or common law causes of action that may provide for more generous remedies than

what is available under ERISA. The preemption of these state law claims has been controversial,

as it can significantly impact plaintiffs relative to their opportunity to recover various types of

damages under state law. The question of which state law claims are preempted by ERISA

502(a)(1)(B) has been controversial and has received significant attention from the courts.

The Supreme Court in Pilot Life v. Dedeaux181 evaluated whether a state law claim for wrongful

denial of benefits was preempted by Sections 514 and 502 of ERISA.182 The plaintiffs in Pilot

Life claimed that the denial of disability benefits by insurers of ERISA-regulated plans violated a

Mississippi common law relating to bad faith. In finding the state law claim preempted by Section

502, the Court reasoned that the civil enforcement provisions of 502(a) of ERISA are intended to

be the “exclusive vehicle” for actions asserting improper processing of a claim for benefits.

Further, in explaining why state law claims (and remedies) were not available, the Court

explained:

... the provisions of 502(a) set forth a comprehensive civil enforcement scheme that

represents a careful balancing of the need for prompt and fair claims settlement procedures

against the public interest in encouraging the formation of employee benefit plans ... the

policy choices reflected in the inclusion of certain remedies and the exclusion of others under

the federal scheme would be undermined if ERISA-plan participants and beneficiaries were

free to obtain remedies under state law that Congress rejected in ERISA.183

In Aetna Health Inc. v. Davila,184 two individuals sued their insurance carriers, claiming the

carriers violated the Texas Health Care Liability Act when they failed to exercise ordinary care in

denying benefit coverage. 185 The insurance carriers removed the cases to the federal district court

and argued that Section 502(a)(1)(B) of ERISA completely preempted the respondents’ causes of

action.

At issue for the Supreme Court was whether the individual’s causes of action were preempted by

Section 502(a) of ERISA and, thus, removal to federal court was proper. Respondents argued,

among other things, that their state law claim for violating the “duty of ordinary care” arises

independently of any duty imposed under ERISA. However, the Court disagreed, finding that

“respondents bring suit only to rectify a wrongful denial of benefits promised under ERISAregulated plans and do not attempt to remedy any violation of a legal duty independent of

ERISA.” The Court, relying on its decision in Pilot Life, among other cases, explained that a state

cause of action that “attempts to authorize” a larger remedy than ERISA Section 502(a) does not

place it outside of an ERISA claim. 186

181

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 43 (1987).

See section “1. Section 514” for a discussion of ERISA § 514, ERISA’s express preemption provision.

183

Pilot Life, 481 U.S. at 54.

184

Aetna Health Inc. v. Davila, 542 U.S. 200 (2004).

185

Id.

186

Id.

182

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Summary of the Employee Retirement Income Security Act (ERISA)

3. Claims to Redress Breaches of Fiduciary Duty

Section 502(a)(2) of ERISA authorizes the Secretary of Labor, a participant, a beneficiary, or a

plan fiduciary to bring a civil action caused by a breach of fiduciary duty under Section 409 of

ERISA. That section makes a plan fiduciary personally liable for breaches against an ERISA plan,

and a breaching fiduciary must make good to the plan “any losses to the plan resulting from a

breach” and restore to the plan any profits made from using the assets of the plan in improper

ways. 187 It also subjects such a fiduciary to other relief as a court may deem appropriate,

including removal of the fiduciary.

One controversial issue with respect to breach of fiduciary duty claims under ERISA has been

that while an individual plaintiff (e.g., a plan participant) may bring a civil action under Section

502(a)(2), the Supreme Court has found that any recovery must “inure ... to the benefit of a plan

as a whole.”188 In Massachusetts Mutual Life Insurance Co. v. Russell,189 the Supreme Court

evaluated whether a plan beneficiary could bring a civil action for monetary damages against a

plan fiduciary who had been responsible for the improper processing of a benefit claim. The

plaintiff, who was disabled with a back injury, sought to recover damages after her employer’s

disability committee terminated (and later reinstated) her disability benefits. The Court rejected

the beneficiary’s claim, explaining that ERISA Section 409 did not authorize a beneficiary to

bring a claim against a fiduciary for monetary damages.190 Based on the text of Section 409 and

the legislative history of ERISA, the court opined that relief for an individual beneficiary was not

available under Section 409; a plaintiff could only recover losses on behalf of the plan.

The Supreme Court’s 2008 decision in LaRue v. DeWolff, Boberg & Associates addressed whether

Section 502(a)(2) authorizes a participant in a defined contribution plan to sue a plan fiduciary

and recover losses to the plan, if the losses only affected an individual’s plan account.191 In

LaRue, a participant in a 401(k) plan requested that plan administrators change an investment in

his individual account. The plan administrators failed to make this change, and the individual’s

account suffered losses of approximately $150,000. LaRue brought an action under Section

502(a)(2) alleging that the plan administrator breached his fiduciary duty by neglecting to

properly follow the investment instructions. The Court held for the plan participant, finding that

“although §502(a)(2) does not provide a remedy for individual injuries distinct from plan injuries,

that provision does authorize recovery for fiduciary breaches that impair the value of plan assets

in a participant’s individual account.” In the decision, Justice Stevens, writing for the majority,

distinguished LaRue from the Russell case in two ways. First, the Court explained that the type of

fiduciary misconduct occurring in La Rue violated “principal statutory duties” imposed by ERISA

that “relate to the proper plan management, administration, and investment of fund assets.”192

187

ERISA § 409, 29 U.S.C. § 1109.

Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 140 (1985).

189

Id.

188

190

In its decision the Court noted that it declined to decide “the extent to which section 409 may authorize recovery of

extracontractual compensatory or punitive damages from a fiduciary by a plan. 473 U.S. 134, 144 n. 12 (1985). See

also Mertens v. Hewitt Assocs., 508 U.S. 248 (1993) (in a dissenting opinion, Justice White observed that courts are

split on whether punitive damages may be recovered under ERISA 502(a)(2)). Mertens, 508 U.S. at 273 n.6 (White, J.,

dissenting)).

191

LaRue v. DeWolff, Boberg & Associates, 2008 LEXIS 2014 (2008).

192

Id. at 9 (quoting Russell, 473 U.S. at 142).

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Summary of the Employee Retirement Income Security Act (ERISA)

Conversely, in Russell, the fiduciary’s breach (i.e., a delay in processing a benefit claim) fell

outside of these principal duties.193

Second, the Court found that in Russell, the emphasis placed on protecting the “entire plan” from

fiduciary breach under Section 409 applies to defined benefit plans, which were the norm at the

time of the case.194 However, as the Supreme Court noted in LaRue, defined contribution plans

are more popular today, and the “entire plan” language in Russell does not apply to these plans.

The Court explained that for defined benefit plans, fiduciary misconduct would not affect an

individual entitlement to a benefit unless the misconduct detrimentally affected the entire plan.

By contrast, “for defined contribution plans ... fiduciary misconduct need not threaten the

solvency of the entire plan to reduce benefits below the amount that participants would otherwise

receive.”195 The Court went on to note that “whether a fiduciary breach diminishes plan assets

payable to all participants and beneficiaries, or only to persons tied to particular individual

accounts, it creates the kinds of harms that concerned the draftsmen of §409.”196

4. Claims to Enforce Plan Provisions and “Other Equitable Relief”

Section 502(a)(3) of ERISA permits a participant, beneficiary, or fiduciary, to bring a civil action

to enjoin any act or practice which violates ERISA or the terms of the plan, or obtain “other

appropriate equitable relief”197 due to an ERISA violation. Section 502(a)(3) of ERISA has been

referred to as a “catchall” provision—claims that may not be brought under other Sections of 502,

but are nevertheless violations of ERISA or the plan, can be brought under this section. 198 The

Supreme Court in Varity v. Howe found that individual relief under Section 502(a)(3) is

available. 199 However, courts have struggled with the scope and meaning of the term “other

appropriate equitable relief” in Section 502(a)(3). This issue has been considered one of the most

controversial areas of ERISA jurisprudence. 200 The controversy has often arisen in cases in which

plaintiffs had sought monetary relief for ERISA Section 502(a)(3) violations.

193

In addition, as the Court points out, unlike LaRue, the plaintiff in Russell received all the benefits to which she was

entitled.

194

While the plan at issue in Russell was a disability plan rather than a defined benefit plan, the Court applied the logic

in Russell to defined benefit plans. See id. at 12-13.

195

Id. at 12.

196

Id. Although all of the Justices agreed on the outcome of the LaRue case, they disagreed as to the reasoning behind

it. See LaRue 2008 U.S. LEXIS 2014, 17 (2008) (Roberts, J. concurring) and 2008 U.S. LEXIS 2014, 20 (Thomas, J.

concurring). For additional discussion of this case, see CRS Report RS22827, Liability of Plan Fiduciaries under

ERISA: LaRue v. DeWolff, Boberg & Associates, by Jennifer Staman.

197

Courts sometimes determine whether the relief a plaintiff seeks is legal or equitable. Colleen Murphy, Money as a

“Specific” Remedy, 58 Ala. L. Rev. 119, 134 (2006). This distinction dates back to the “days of the divided bench,”

when England (and subsequently the United States) maintained separate courts of law and courts of equity. See

generally Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 212 (2002). One important way these courts

differed from each other was the remedies available to plaintiffs. Historically, the most common remedy in the courts

of law was money. Id. at 135. The most common remedy in the courts of equity was an order for an individual to do

something or refrain from doing something, such as with an injunction. Id. The scope of remedies available at law and

at equity have been the subject of debate. While there is no longer this divided court system, courts may still evaluate a

claim based on this dichotomy.

198

See Varity Corp. v. Howe, 516 U.S. 489 (1996).

199

Id.

200

Roy F. Harmon III, ‘Equitable Relief’ Claims under ERISA Section 502(a)(3), 20 Benefits Law Journal 33 (2007).

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Summary of the Employee Retirement Income Security Act (ERISA)

The Supreme Court first evaluated the meaning of “equitable relief” in Mertens v. Hewitt

Associates.201 In this case, plan participants brought an action under Section 502(a)(3) seeking

monetary relief after the plan actuary failed to make proper actuarial assumptions in calculating

plan assets. Participants claimed that this error contributed to plan underfunding, and

subsequently, to the plan’s defaulting on promised retirement benefits. The Court found that the

monetary relief the participants sought was nothing other than compensatory damages, and held,

in a 5-4 decision, that ERISA Section 502(a)(3) did not authorize suits for compensatory damages

against a non-fiduciary. In explaining why these damages were not available, the Court

articulated that “equitable relief” with respect to Section 502(a)(3) is relief that was “typically

available in equity,” such as injunction, mandamus, or restitution. While it had been argued that

the relief petitioner sought was considered equitable under the common law of trusts, the Court

rejected this argument. It explained that while “legal” remedies may have been available to

plaintiffs in a court of equity, this idea did not “define the reach” of Section 502(a)(3), and that

what was available under Section 502(a)(3) were the more “traditional” forms of equitable

relief.202

The Supreme Court applied the reasoning of Mertens in another decision interpreting Section

502(a)(3), Great West Life & Annuity Insurance Co. v. Knudson.203 In this case, a group health

plan sought reimbursement from a plan beneficiary for amounts the plan had paid after the

beneficiary was severely injured in an automobile accident. After the accident, the beneficiary

brought an action against the automobile manufacturer and others, and she received a settlement.

The plan claimed it was entitled to the settlement amount based on a provision in the plan

requiring plan participants to reimburse the plan for any amounts the beneficiary receives from a

third party.204

In another 5-4 decision, the Court found for the beneficiary, holding that Section 502(a)(3) did

not authorize the reimbursement sought by the plan. The health plan claimed the relief sought was

restitution,205 which could be characterized as equitable relief. The Court refused to accept this

reasoning, explaining that while restitution could be found traditionally in courts of equity, what

mattered for purposes of Section 502(a)(3) was whether the restitution sought was to restore to

the plaintiff particular funds or property in the defendant’s possession. Because the proceeds of

the settlement were not in the identifiable defendant’s possession (i.e., they had been paid to a

trust, to the plaintiff’s attorney, etc.), the plaintiff’s claim for equitable relief failed.206

201

508 U.S. 248 (1993).

See id. at 255, 256.

203

Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002).

204

This type of claim is referred to as a subrogation claim. For additional discussion of a subrogation claim, see

footnote 236 infra and accompanying text.

205

“Restitution” has been defined as “return or restoration of some specific thing to its rightful owner or status.”

Black’s Law Dictionary 1315 (7th ed. 1999). It has been noted that restitution is an ambiguous term, sometimes

referring to the disgorging of something which has been taken and at times referring to compensation for injury done.”

Id. (citing John D. Calamari and Joseph M. Perillo, THE LAW OF CONTRACTS, § 9-23 at 376 (3d. Ed. 1987).

202

206

Cf. Sereboff v. Mid-Atlantic Services, 547 U.S. 356 (2006) in which the Supreme Court found health plan

administrators were entitled to equitable relief under Section 502(a)(3). Similar to the Great West case, in Sereboff,

plan participants were in an automobile accident, and their health plan paid medical expenses on the participant’s

behalf. Later, after the participants had received a settlement amount arising from a claim brought because of the

accident, the health plan sought reimbursement from plan participants. In finding that the relief sought by the

administrators was equitable under Section 502(a)(3), the Court distinguished the Sereboff case from Great West

because, among other things, the amounts in question in Sereboff were identifiable, as they were set aside in an

(continued...)

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Summary of the Employee Retirement Income Security Act (ERISA)

5. Criminal Enforcement under ERISA and Other Federal Law

ERISA provides for three types of criminal sanctions. First, Section 501 provides that any person

who willfully violates the reporting, disclosure and other related provisions207 of ERISA may be

fined up to $100,000, imprisoned up to 10 years, or both.208 Persons other than individuals (e.g.,

corporate entities) may be fined up to $500,000. Conduct that may be prosecuted under Section

501 includes a willful act as well as an omission to perform reporting or disclosure required by

ERISA.209 Second, Section 511 states that it is unlawful for any person to use (or threaten to use)

fraud, force, or violence in interfering or preventing a person from exercising rights under an

employee benefit plan. 210 Persons who willfully violate this section can be fined $100,000 or

imprisoned for not more than ten years, or both.

Third, Section 411 bars individuals convicted of various crimes from holding certain positions

with regard to an employee benefit plan.211 Individuals convicted of these crimes may not serve

(1) as an administrator, fiduciary, officer, trustee, custodian, counsel, agent, employee, or

representative of a plan in any capacity; (2) as a consultant or advisor to a plan; or (3) in any

capacity that involves decision-making authority or custody or control of the moneys, funds,

assets or property of any plan.212 Under this section, individuals may be barred from service

during or for the period of 13 years after conviction or after imprisonment, whichever is later.

This time period is subject to certain exceptions.213 In addition, Section 411 prohibits an

individual from knowingly hiring, retaining, employing, or otherwise placing someone to serve in

any capacity which violates this section. Individuals who intentionally violate this provision are

subject to a fine of no more than $10,000, up to five years imprisonment, or both.

Besides the three provisions under ERISA, the Federal Criminal Code prohibits certain conduct

relating to employee benefit plans. Provisions under the Federal Criminal Code include the

following:

•

Under Section 664 of Title 18, any person who embezzles, steals, or unlawfully

and willfully abstracts or converts to his own use (or to the use of another) any

assets of an employee benefit plan, will be fined, imprisoned no more than five

years, or both. Assets of a plan include money, securities, premiums, and

property.

•

Under Section 1127 of Title 18 of the United States Code, any individual who

knowingly makes a false statement or representation of fact, or knowingly

conceals, covers up, or fails to disclose any fact on certain documents required

(...continued)

investment account.

207

29 U.S.C. § 1021 et seq.

208

29 U.S.C. § 1131.

209

EMPLOYEE BENEFITS LAW 1400 (Matthew Bender 2d ed.)(2000).

210

29 U.S.C. § 1141.

211

Crimes that prevent an individual from service with an employee benefit plan include robbery, bribery,

embezzlement, murder, perjury, crimes that disqualify individuals from serving as an investment advisor (see 15 U.S.C.

§ 80a-9(a)(1)), as well as violations of ERISA. See 29 U.S.C. § 1111(a).

212

Id.

213

Id.

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Summary of the Employee Retirement Income Security Act (ERISA)

under ERISA may be subject to criminal penalties of up to $10,000, five years in

prison, or both.

•

Section 1954 of Title 18 prohibits various persons serving in positions relating to

employee benefit plans from (1) soliciting or receiving or (2) giving or offering

any fee, kickback, commission, gift, loan, money or other item of value because

of, or to influence, a certain question or matter concerning an employee benefit

plan.214 Persons violating this section may be fined, imprisoned for up to three

years, or both. An exception to Section 1954 may be made for a person’s salary,

compensation, or other payments made for goods and services furnished or

performed in the regular course of a person’s duties to the plan.

Section 506(b) of ERISA provides that the Secretary of Labor has the responsibility and authority

to detect, investigate, and refer both civil and criminal violations of ERISA as well as other

related federal laws, including the provisions under the United States Criminal Code. 215 ERISA

also requires the Secretary of Labor to provide evidence of crimes to the United States Attorney

General, who may consider this evidence for purposes of criminal prosecution.216

K. Preemption of State Laws

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