Is it okay not to choose a governing State law?

[Peter Gulia]

A typical prototype or volume-submitter document's adoption agreement often includes a fill-in-the-blank choice for specifying a State's law to govern whatever ERISA doesn't preempt (if anything).

Imagine that a user prefers not to fill in this blank. (The plan's sponsor is worried that a specification could be argued to constrain the administrator's discretion to a narrower range than would apply if the plan states nothing about State law.)

The rules for relying on the IRS's letter for a preapproved document call for staying within the confines of what the IRS approved. But the Revenue Procedure suggests that a user might vary some "administrative" provisions without losing reliance on the IRS's letter.

What do you think? If a user's adoption agreement leaves blank the State-law line (or responds "none"), does the user keep or lose reliance on the preapproved document's IRS letter?

[My 2 cents]

Preface: I am not a lawyer, and the following may be entirely wrong.

Assuming that we are talking about a corporation, every corporation is incorporated in a particular state. I would expect that every action taken by that corporation would, to the extent not subject to overriding federal rules, be subject to the laws of the state of incorporation. Failure to explicitly specify that state in the plan document is unlikely to affect the relevant jurisdiction to which the plan is subject (to the extent not preempted by federal law).

I would not expect that failing to clearly specify in the plan document which state's laws would apply to situations in which federal law's preemptive powers do not apply would be a federal qualification issue. However, it might complicate any litigation issues that may arise with respect to the plan. Wouldn't specifying the applicable state in the plan document foreclose lawsuits attempting to subject the plan to the laws of other states?

[Belgarath]

Random musings...

Unusual drafting. All the pre-approved plans I have seen (or perhaps those that I've noticed) have a default which is generally the state (or commonwealth) of the principal office location of the employer, or corporate trustee, etc... - UNLESS specified otherwise in the adoption agreement/appendix/whatever.

Are you sure there is no such default language in the body of the plan you are looking at? If not - if it is truly a fill-in-the-blank option and there is no default language, then as a non-lawyer, I would tend to agree with my 2 cents.

I doubt that the IRS would disqualify a plan for failure to complete this option, but relying on their generosity might not be a good policy.

[hr for me]

Agree with My2Cents. I would also counter with if you leave it blank/none, are you saying that only ERISA governs and if ERISA is silent that no state law could be used to protect the sponsor? You would need to be sure you weren't marking out all states laws in the process. Because then you are like they said, adding a litigation issue that probably has nothing to do with the original purpose of the lawsuit.

But I suspect like My2Cents states that there WOULD be a state that would and would the employer/corporation rather pick the state or let whoever is filing the lawsuit do so? I would think the employer/corporation would want to pick the jurisdiction as they would be more well versed in that state law.

The decision to not put a state in just doesn't sit right with me. And I am not a lawyer either.

[Peter Gulia]

My 2 cents, Belgarath, and hr for me, thank you for your considerate help.

Belgarath, you are right that some preapproved documents include a default: for example, saying a blank line results in a specification of the State in which the plan's sponsor is incorporated or similarly organized. (That's why sometimes a response might be writing-in the word "none" as an attempt to negate such a default.) A CCH/Fort William volume-submitter document I saw recently did not include such a default.

I am not worried about the Internal Revenue Service tax-disqualifying a plan. Instead, I'm thinking about whether an employee-benefits lawyer can advise his client that leaving blank (or negating) the State-law specification does not undo the user's reliance on the preapproved document's IRS letter.

If one can't be confident about that conclusion, a lawyer advising his or her client about its use of a preapproved document might feel a need to explain the advantages and disadvantages of specifying a State law and the relative probabilities of the risks involved.

The IRS's resolve to provide fewer opportunities for a user to get a determination will make more important questions about whether a user's adoption agreement is within, or strays from, a preapproved document's confines.

BenefitsLink mavens, any further thinking on whether a fair reading of the Revenue Procedure allows a user to rely on the preapproved document's IRS letter if the user omits a State-law specification that the document asks for?

[mbozek]

IRS doesn't care about leaving a state choice of law provision blank because IRS only regulates the tax law. Every ptype /individual plan I have reviewed designates a state law because sponsor wants a law that it is familiar with, e.g, state of incorporation, which will not disrupt its operations. Most financial institutions designate NY because they know the state laws and they do not have to deal with anti business laws in other states which could cause a conflict.

If plan does not designate a state law under a choice of law provision then it runs the risk that a court will select a state law that will be detrimental to the plan sponsor's interest.

[Lou S.]

I can't speak for all prototype documents but I'm almost certain that ours had a clause in the Master Text that said if it it wasn't answered that the State Law or the Plan Sponsor (or maybe the Plan Administrator which in our case was usually the same) would govern.

[Peter Gulia]

If ERISA governs a plan (and ERISA preempts State law), under what circumstances would a choice of State law be needed?

[hr for me]

One would probably need to be very versed in both ERISA and state laws to come up with an actual example. It would have to be something that ERISA doesn't cover, but two laws differ on. My first random thought was the definition of a spouse/marriage prior to the federal SC decision requiring all states to cover spouses regardless of gender. Don't know if that is a good accurate one, but that is the first thing that came to mind.

[My 2 cents]

If ERISA governs a plan (and ERISA preempts State law), under what circumstances would a choice of State law be needed?

My guess: Beneficiary designations, rules concerning disposition of estates (including intestate succession), what it means for the spouse to survive the participant, competence or incompetence of payees, validity of powers of attorney, that sort of thing. Probably a number of other areas. If ERISA does not concern itself with certain details because they would normally fall under the jurisdiction of state laws, there might not be federal preemption. Any time you read about a contested benefit being turned over for resolution through an interpleader action (for example, conflicts involving divorce or common-law marriages), state law governs, right?

[MoJo]

The one thing I ALWAYS advise my clients to avoid is having a judge decide things that they could have decided themselves trough careful drafting of documents.

Under our system of jurisprudence, some things are dealt with under federal law, some are dealt with under state law, and some are dealt with under "common law." ERISA and the tax code pre-empt, but they don't cover everything - so one looks to "state law." WHICH STATE LAW APPLIES is often very complicated and difficult to determine. State law may impact how trusts are governed. ERISA says a trust must be used, but doesn't specify how to establish one (and there is no "federal law of trusts"), and while it may indicate who can't be a trustee (trust me, ERISA has a few prohibitions), it doesn't say WHO can be the trustee. For example, in SOME states, a NON-trust company corporation CANNOT be trustee of it's own employee benefit plan. In others, a NON-trust company corporation CAN be trustee but ONLY of it's own employee benefit plan, but no other trusts. Its State law based (and in that case, there could be a CONFLICT between the state of incorporation (often Delaware) and the state of it's principal place of business (GM is a Delaware corp with it's main office in Michigan - which state governs?)).

Those are the "simple" issues. IF YOU DO NOT SPECIFY WHICH STATE LAW GOVERNS IN NON-PRE-EMPTED AREAS, The judge gets to decide - and that's just plain stupid.... Why not put some predictability in the process and spell it out?

[Peter Gulia]

hr for me, My 2 cents, MoJo, thank you for the helpful thoughts.

But I consider the spouse and beneficiary examples as illustrations of why some employee-benefits lawyer feel it's at least unnecessary, and perhaps unwise, to mention a State's law.

For example, if a retirement plan's administrator needs to decide whether a participant has a spouse such that the participant may not elect a distribution other than a qualified joint and survivor annuity without her spouse's consent, the word "spouse" has the meaning given by ERISA section 205 and the plan (insofar as the plan is consistent with ERISA titles I and IV). And if the plan's terms (which include any required under ERISA section 205) are ambiguous, or the application of the plan's terms to a set of facts is unclear, a typical plan grants the administrator discretion to construe, interpret, and apply the plan's terms, and even to make discretionary findings of facts.

It might be strange to apply a Plan-specified State law to a particular set of facts. Imagine a plan sponsor that is a California corporation and in its retirement plan specifies California law. Imagine that an opposite-sex couple have both always lived and worked in Pennsylvania. Does it seem strange to apply California law to resolve a question about the existence or non-existence of a marriage of two people who have always lived and worked in Pennsylvania?

More importantly, instead of plan-document language that someone could argue tells the administrator to look to a particular State's law, might an administrator prefer to use its plan-granted discretion?

(A court defers to an ERISA plan administrator's exercise of discretion, even if the administrator's decision is contrary to what would have resulted under State law.)

MoJo, my query didn't consider State law concerning a trust, because every documenting situation I advise on has a trust agreement that is separate from the plan document. For a trust, even a trust for an ERISA-governed plan, a choice of State law might have a consequence. In many situations I see, the choice of State law in the trust agreement is different from the plan sponsor's choice of law in the plan.

[MoJo]

"Does it seem strange to apply California law to resolve a question about the existence or non-existence of a marriage of two people who have always lived and worked in Pennsylvania?"

No. California law would tell you to look to the law of the state where it was either solemnized or where the parties live. It isn't as simple as saying the ONE state specified is the LAW NATIONALLY. Every state has a "conflict of laws" law that governs how you do such things, and the U.S. Constitution also specifies that each state must respect the laws of other states (i.e., apart from the same sex marriage issue PRE-SCOTUS decision), a marriage recognized in one state had to be recognized in all other states. A drivers livense issued in one state is valid nationally. etc....

I hate to do this, but "don't oversimplify" conflicts of laws issues. The question fundamentally is, whose laws do you want to be held to? If you specify, it can be your "home" state. If you don't, it could be the laws of the state where your disgruntled salesperson resides in - and in which you have no other employees or contact, and that might have a legal requirement that governs covenants not to compete and you only find out that your "home state" law doesn't apply, but your disgruntled salespersons state law does apply - AFTER he's stolen your trade secrets.... Trust me. It happens..

As far as an ERISA definition being lost to a state law definition - it's as simple as putting a "any term defined in ERISA shall be given that definition for purposes of interpreting this Plan" language in the document...

[Peter Gulia]

Mojo, it's easy to agree with your business-sense observations about choice of law for matters other than the terms of an ERISA-governed IRC 401 retirement plan. Your last paragraph shows why an ERISA-governed plan's administrator shouldn't need any State's law.

[mbozek]

examples of when state law would apply - what is a valid power of attorney, is common law marriage valid, who is a successor beneficiary under state law, which state community property law applies, which spouse is beneficiary when deceased employee was married to two spouses at death, was divorce valid. Of course the plan can elect to file an action in interpleader and let a federal judge decide the rights of the parties.

I don't think a plan needs to determine whether a trust is valid under state law or whether a trust is a valid plan beneficiary under state law in order to receive a benefit since the Kennedy decision only requires that the plan administrator determine who is the beneficiary under the plan without reviewing whether the beneficiary is eligible to receive the benefits under state law. After the benefits are paid another claimant can challenge the beneficiary's right to the benefits under applicable state law without the plan becoming involved.

Advantage of designating in advance what state law applies to questions arising under the plan is that plan administrator has a presumptively valid basis for making decisions if there is a legal dispute involving the plan, e.g, beneficiary dispute.

I don't understand the reason to omit a choice of law provision when having one eliminates uncertainty or ambiguity as to how the plan is to be interpreted.

[Peter Gulia]

I've enjoyed the benefit I asked for, getting several practitioners' thoughts. Thank you all for helping me focus my thinking.

[MoJo]

FGC said: "Your last paragraph shows why an ERISA-governed plan's administrator shouldn't need any State's law."

Sorry - but ERISA doesn't define everything that is required for an ERISA covered plan. See mbozek's comments above - and I would include that state law does in fact govern may of the duties and powers of a trustee. Indeed, if you use an institutional trustee, that "entity" may be organized under the laws of a particular state. For example, EVERY ONE OF SCHWAB'S TRUST AGREEMENTS SPECIFIES CALIFORNIA AS THE STATE LAW THAT GOVERNS THE RELATIONSHIP - and that is NOT negotiable (I used to work for them, and even some of their largest clients were unsuccessful in getting that changed. Schwab Trust Company is a California chartered "State" Trust Company.

[GBurns]

FCG. I add to MoJo's comment, just because you/the Plan states that ERISA governs the Plan does not make it so. There can be challenges to almost anything, especially since ERISA does not define everything.

Why leave a door open, which could be used against you? Just choose your state of domicile, so that any legal challenges will be local. It is much easier to handle a local case, than a case in another, maybe even distant, state.