What Now For ERISA 2017? By: Paul Friedman

What Now For ERISA 2017?

The June 2017 decision by the Supreme Court in the church plan controversy is another in a series of events that occurred within the last year that demonstrates that the faith of American employers and their employees in the employee benefits system established under ERISA may be misplaced. 

CHURCH PLANS

The church plan decision itself involved three consolidated actions and three defined benefit pension plans of large medical conglomerates that sought to utilize an exemption provided under ERISA to avoid obligations owed to their employees.  The church plan exemption initially adopted by the framers of ERISA to comply with the separation of church and state originally only applied to a “... plan established and maintained by a church.”  However, that definition was expanded in 1980 under the Talmadge amendment to “include” another type of plan — “a plan maintained by a principal purpose organization.”  

In reaching its decision, the Supreme Court applied a rule of strict statutory construction and concluded that the definition of church plan should include those covered by the 1980 amendment stating that “under the best reading of the statute” that a principal purpose organization qualifies as a ‘church plan’ regardless of who established it.” 

The impact of the decision will be far broader than simply on defined benefit pension plans.  Rather, if established by a “principal purpose organization,” any type of ERISA plan, such as  defined contribution pension plans and employee welfare benefit plans would qualify for the exemption.  ERISA protections as basic as the annual reporting requirement, i.e., the Form 5500 and the prudent man standard of Section 404 required of all fiduciaries, are not applicable to church plans.  Moreover, the Pension Benefit Guaranty Corporation (PBGC) will no longer provide protections to participants if defined benefit church plans face severe financial difficulties.  

Medical coverage will also be affected because COBRA is part of ERISA.  As such, the right to COBRA coverage will cease to exist for participants in plans established by principal purpose organizations.  

Most troubling to this observer was the lack of concern demonstrated by the Supreme Court in its decision.  Although being fully cognizant of the separation of powers doctrine and the role of the Supreme Court to interpret rather than to make law, the decision appeared to be somewhat callous.  Only Justice Sonia Sotomayor in her concurrence with the court’s decision, referred to the protection promised by ERISA that an employee who has “…fulfilled whatever conditions are required to obtain a vested benefit…will actually receive it.”  She expressed concern over the outcome of these cases and stated what is obvious: Defendants had been organizations that operate for-profit subsidiaries, employ thousands of people, earn billions of dollars in revenue, and compete with companies that have to comply with ERISA. 

Obviously, this is not the end of church plan litigation.  However, in the interim it appears that cases involving church plans will need to rely upon state law for disposition.  The uniform law of pensions envisioned by the framers of ERISA will no longer apply.

 

TAFT-HARTLEY PLANS

The past year also saw the first reduction of “core benefits” in Taft-Hartley defined benefit pension funds that faced increased underfunding.  Those are union-sponsored plans and are unlike defined contribution plans.  The defined contribution plans only promise a retirement benefit based upon a combination of the amount of contributions made and the investment choices of an employee.  Hence, an employee who makes large contributions and employs a good investment strategy will logically have more monies for retirement than an employee who does neither.  In contrast, multi-employer defined benefit pension funds rely upon contributions made by all employers and the investment return of the entire corpus of the fund to pay for promised retirement benefits.

No participant in a defined benefit pension fund has a proprietary interest in any specific account.   Rather, the amount of promised retirement benefits that become obligations of the fund after a participant attains a minimum of five years service in a plan (“vesting”) and increases based upon each additional year of service accrued are calculated by actuaries using historical data to set the promised benefit to a participant.   At present, actuaries are setting benefit entitlements based on a fund achieving an investment return of 7.5%.

There are few “prudent” investments that are achieving anywhere near a 7.5% return.  However, pensions being promised today use that rate of return.  This has resulted in an underfunding of a pension fund.  Simply, the difference between the amount of promised pensions that are legally enforceable obligations of the fund and the actual monies of the fund available to pay those pensions represents underfunding.  If a fund has pension obligations of $100 but only possesses $60 to pay those obligations, that fund would be 40% underfunded.  Obviously, if this situation continued, the fund would run out of money. 

In the aforementioned example, $100 would be the core benefit that had been promised.  Until recently, that core benefit was sacrosanct.  It could not be reduced after it was earned.  However, the underfunding has become so severe and pervasive among the multi-employer defined benefit pension funds that Congress adopted legislation, the Multiemployer Pension Reform Act of 2014 (MPRA), to permit drastic reductions in core benefits of 50% or more if a fund could establish to the satisfaction of the Treasury Department that its financial status was disastrous and that it would run out of money if relief was not granted. 

More than 10 pension funds applied.  Among those was the Central States Southeast and Southwest Areas Pension Fund, which is projected to run out of money in less than 10 years.  Its application was publicly opposed by a group of senators led by Senator Elizabeth Warren of Massachusetts and was ultimately rejected by the Treasury Department.  Of all applications, only that of the Iron Workers’ Local 17 Pension Fund was granted. 

Another fund that sought relief under MPRA was the New York State Road Carriers Local 707 Pension Fund.  Its application was denied. On March 1, 2017, the fund ran out of money and sought PBGC assistance.  According to PBGC, prior to its takeover of the fund, the average Local 707 Pension Fund was receiving a pension of $1,313 per month.  The average monthly payment will be slashed by PBGC to $570, a reduction of 56%.

Clearly, the status of employee benefit funds in 2017 falls short of the goals sought by its framers in the passage of ERISA.

 

Paul A. Friedman is a principal in the White plains, NY, office of Jackson Lewis, P.C.

He can be reached at Paul.Friedman@jacksonlewis.com or 914-872-8060.

Paul A. Friedman

Paul A. Friedman is a principal in the White Plains, NY, office of Jackson Lewis, P.C. He has tried more than 35 jury trials. He has also tried more than 200 arbitrations and bench trials on all aspects of ERISA.

He has more than 35 years of experience in litigating cutting-edge ERISA issues before...

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