When Does an Employer Have an ERISA Plan?

April 24th, 2008

Many employers might assume that an ERISA plan is not created until they actually set up a plan, write a plan document and take formalized steps to create a plan.  However, this is not necessarily the case. 

Employers need to be cautious when establishing an employee benefits program as they can inadvertently create an ERISA plan or find themselves in a situation where a common “ongoing administrative scheme” can be construed to be an ERISA-governed benefits plan.  If this happens, the employer will then find itself with an ERISA plan that is not in compliance with ERISA requirements, one of which is a written plan document.

Currently, courts use a 3-part test to determine whether an ERISA plan exists.  The factors the court will consider are: (1) whether a plan exists; (2) whether the plan falls within the Department of Labor’s (DOL) safe-harbor provision; and (3) whether the plan was established or maintained by employer with the intent to benefit employees.  

This is a facts and circumstances inquiry analyzing the specific facts and circumstances surrounding the questioned plan.  On of the key areas considered is a determination of whether there is an “ongoing administrative scheme” as opposed to a “one-time, lump sum payment triggered by a single event” that does not require an administrative scheme. 

Additionally, courts will look at facts surrounding:

  • Representations made by employers in internal documents,
  • Representations made orally by the employer,
  • The employer’s intent,
  • Whether a fund has been established to pay benefits,
  • How any benefits are paid, and
  • The employee’s reasonable understanding of the program.

For example, in Moorman v. Unum Provident Corp., the court found that an employer had unintentionally created a Long-Term Disability (LTD) Plan that was governed by ERISA.  In reviewing the surrounding facts and circumstances of the program’s administration, the court concluded that a reasonable employee could conclude that it was an employer-sponsored plan; therefore, despite the employer’s intent, the LTD program met the requirements that establish an ERISA benefit plan.

However, there is a safe harbor exemption from ERISA for certain types of voluntary benefits plans.  In order to qualify for this exemption there must be no employer contributions, participation by employees is voluntary, the employer’s role in the plan is limited to collecting premiums through payroll deductions and remitting them to an insurer and the employer does not receive any compensation for its services other reasonable compensation for administrative services.

Unfortunately, employers can inadvertently trigger significant problems by trying to provide better benefits for their employees.  Before establishing any new benefits program or changing an existing program that provides benefits to employees, employers should consult with their benefits lawyer to ensure that their attempt at providing for their employees does not have unintended consequences.  Additionally, employers should periodically audit their practices to ensure that ERISA-governed plans are not inadvertently created.

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