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Think You Have an ERISA Plan? Don't Be So Sure

Posted on Mon, Oct 21, 2013

If you have an ERISA plan, it generally means your company is shielded from lawsuits that originate in state courts. This is usually good for employers, because it's harder for employees (current or former) to "make a federal case out of it" than it is for them to prevail at the state level. Having an ERISA plan also makes it less likely a state legislature could micromanage how you run a benefit plan. However, don't simply assume your plan is an ERISA plan or you could wind up in hot water. 

Take a look at how a recent court case illustrates the effect of ERISA on a legal dispute.

In Cantrell v. Briggs & Veselka Co., the U.S. Court of Appeals for the 5th Circuit had to decide whether or not a pair of employment contracts amounted to a benefit plan covered by ERISA. The plan defined the formula for a deferred profit-based payout scheme. The two employees involved had merged their professional practice with a larger public accounting firm known as Briggs & Veselka Co., seven years prior to the dispute. (Cantrell v. Briggs & Veselka Co., 2013 WL 4523497).

Facts of the Case

The first employee, Patrick Cantrell, resigned after becoming vested in the deferred payout plan (which called for a payout over a 10-year period), opened a new practice, and began receiving payments under the Briggs & Veselka (B&V) plan. Nearly four years later, Carol Cantrell (who had been a partner in the original firm sold to B&V) announced her plan to leave the firm and join Patrick, and sought her benefits under the deferred compensation plan.

B&V's response was to terminate her for cause, alleged violation of a non-compete agreement. She was also denied any benefits under the deferred comp plan. In addition, B&V's ongoing payments to Patrick were halted then for the same reason.

The two Cantrells, in separate cases, sued B&V in the Texas state court system, seeking restoration of their entitlement to the payouts. But B&V "removed" the case to the local federal district court, with the (initially) successful argument that this dispute involved an ERISA plan. When the Cantrells appealed the federal trial court's decision to take the case, they were ultimately successful in persuading the federal appeals court that their comp plan was not an ERISA plan. The appeals court sent the case back to the state court, citing a three-part test it had issued in an earlier case to reach its decision.

Three-Part Test

Specifically, does a plan:

  1. Exist
  2. Fall within the safe-harbor provisions established by the Department of Labor, or
  3. Satisfy "the primary elements of an ERISA 'employee benefit plan,' established or maintained by an employer intending to benefit employees" (quotes from the earlier case, Meredith v. Time Insurance Company).

The appeals court ruled the new case flunked the first test, so the remaining questions were moot: "… we hold the deferred compensation arrangements in the Cantrells' employment agreements do not make out the existence of a plan." The Court pointed out that whether an ERISA plan exists is fact-specific, and proceeded to describe the arrangement in detail.

U.S. Supreme Court's Stance

The appeals court also referenced a U.S. Supreme Court ruling (Fort Halifax Packing Company, Inc. v. Coyne, 482 U.S. 1 (1987)), which involved a severance plan, as a basis for its ruling. Fort Halifax Packing Co. had shut down operations at a plant in Maine. That state's law requires that certain companies which close operations must make a severance payment to laid-off employees equivalent to one week's pay for every year they worked for the company, if they had been employed by the company for at least three years.

In that ruling, the Supreme Court emphasized the distinction between a "benefit" (i.e. what the employee receives) and a "plan" (i.e. the dynamic administrative infrastructure and processes required to keep the plan in operation). "…ERISA uses the words 'benefit' and 'plan' separately throughout the statute, and nowhere treats them as equivalent," the court stated.

A basic purpose of ERISA, held the Supreme Court, is "to allow plans to adopt a uniform scheme for coordinating complex administrative activity, unaffected by regulatory requirements in differing states." But the Maine law which the Court was assessing "neither establishes, nor requires an employer to maintain a plan that would embody a set of administrative practices vulnerable to the burden imposed by a patchwork, multi-state regulatory scheme. In fact, the theoretical possibility of a one-time, lump-sum severance payment triggered by a single event requires no administrative scheme whatsoever to meet the employer's statutory obligation."

The Court also said where a state law "creates no danger of conflict with a federal statute, there is no reason to disable it from attempting to address uniquely local social and economic problems."

Focus on Administrative Requirements

A further elaboration on the Supreme Court's distinction between an ERISA plan and one not covered by ERISA offers the clearest view of the distinction, serving as a guideline on how any benefit plan you offer might need to be structured if you want it to be governed by ERISA. The opinion states:

An ERISA plan exists when an employer which "makes a commitment systematically to pay certain benefits undertakes a host of obligations, such as determining eligibility of claimants, calculating benefit levels, making disbursements, monitoring the availability of funds for benefit payments, and keeping appropriate records in order to comply with applicable reporting requirements."

In the recently decided case involving the two accounting firms, the Cantrells' employment contracts explicitly stated that the 10-year pay-out arrangement was an ERISA plan, presumably in hopes of preempting any future litigation in Texas courts. But, as things stand now, simply calling a deferred compensation arrangement does not make it so. So if you have any relatively simple arrangements which do not involve a lot of discretion or administrative maintenance, be prepared to battle it out in state court if a dispute arises.

Tags: Court Cases, U.S. Supreme Court, ERISA Plan, business consulting, Litigation, CPA Firm, Echelbarger, Lawsuits, EHTC