Irrevocable Trust/ERISA Coverage

[JWRB]

I have an extremely weird scenario that I'm absolutely stuck on.

I have a pre-ERISA irrevocable trust that, for some reason, is being litigated to get it under ERISA coverage.  

Important facts are as follows:

• Trust covers employees of let's say 20 individuals, all within one family.  When a family member dies, the plan automatically covers the next of kin's employees.  So the hypothetical 20 individuals is over a course of years; they weren't all involved at the same time.
• The trust was originally created by one individual, with a few others serving as trustees.  Trustees changed over the years, but suffice to say that most owner individuals never actively participated in the plan; it automatically covered their employees.
• The trust was originally funded with stock; there have since been no other contributions what so ever.  The trust would terminate when it ran out of money or beneficiaries.  Critical, to me, is the fact that no one can amend or terminate the plan, and the trustees' job was limited to directing payouts.  This plan literally has to run its course, and the end is not in sight.  

I have some solid arguments based around establishing/maintaining the plan, so I'm not worried about arguing that element.  The argument I can't substantiate beyond my gut feeling is that basically no entity having autonomy over the plan is OK under ERISA.  In the same breath, I have employers not "maintaining" a plan that they're also forced to participate in in perpetuity, which is bizarre to me.  None of these employers have taken active steps to adopt the plan (barring it's inception), nor have they had any hand in administration.  The whole thing just doesn't sit well with me.

Any insight would be much appreciated; thank you.

[jpod]

To try to be helpful, let's start with a question:  What do you mean when you say "is being litigated," and what role are you playing in the "litigation"? 

[ETA Consulting LLC]

Also, ERISA would cover "Retirement" and "Health and Welfare".  This doesn't not appear consistent with any "Retirement Plan"; where there is a virtual certainty that the assets in the plan will be used by the participants (e.g. when they retire).

This would leave you with "Health & Welfare" where the only way the assets get paid out is through a claim for benefits that are covered under the terms of the "plan".  You have stated that there is a trust that was funded initially funded with stock and have continued to cover the next of kin, but we aren't told what benefits are being provided under that coverage.  Are they paying for long term medical care if, and when, it is needed?

Whatever they're doing, you would be hard pressed to show it is for retirement.

Good Luck!

[JWRB]

Thanks for the replies so far.

I omitted which side I was on as to not influence anything, but since you asked, we're arguing against it being covered by ERISA; an argument I also happen to 100% believe in.

Regarding type of plan, it's 100% for retirement benefits; you work x amount of years for the employer and are guaranteed a pension.  

[MoJo]

2 minutes ago, JWRB said:

Thanks for the replies so far.

I omitted which side I was on as to not influence anything, but since you asked, we're arguing against it being covered by ERISA; an argument I also happen to 100% believe in.

Regarding type of plan, it's 100% for retirement benefits; you work x amount of years for the employer and are guaranteed a pension.  

OK.  So it's a "plan of deferred compensation" (i.e. a "retirement plan") and it benefits employees - hence it's an "employee benefit plan."

Why would it NOT be covered by ERISA?  The fact that it may be non-compliant with Internal Revenue Code rules doesn't necessarily mean it isn't an ERISA plan.  Start with the premise that it is, unless an exemption exists....  What exemption applies?

Just playing devil's advocate here....

[jpod]

The facts aren't clear to me at all.  Who is "maintaining" the plan?  Who is providing the money to pay benefits due under the plan?  What are the benefits to be provided under the plan, and under what conditions and when?

[My 2 cents]

I am trying to wrap my mind around the idea that there are unresolved issues concerning something that arose pre-ERISA.  That was over 40 years ago!

Never mind the way that this thing seems to operate something like a tontine.  I do not understand the way that it is supposed to work, let alone how it would be made to work in the context of an ERISA plan.

[JWRB]

Let me assure you all that this is absolute nonsense to anyone involved aside from those bringing the claim.  We are dumbfounded that this is being litigated.  

I have a really solid argument that the plan doesn't cover employees, and am currently attacking establish/maintain and "employer."

MoJo, I know it's goofy all around.  I'm not arguing that it's lack of compliance with ERISA is damning, I'm looking for something de facto and that, no, this cannot fall under ERISA.  I'm extremely troubled that a plan where noone has autonomy over it can be both under ERISA and forced to operate until its exhausted.  That just runs contrary to what I think the intent behind ERISA was.

jpod, me neither unfortunately.  The plan is "maintained" by the trustee, which has shifted over the years from the original individuals I stated, to a related corporation, now to an independent trustee.  I'm honestly not sure how benefits are currently paid.  The benefits are an annuity based on salary over y period, upon retirement, after x years of service.  I know that employers whose employees were covered under this had de minimis involvement.

My 2 cents, you and me both.  The intent behind it was to provide retirement benefits to lifetime employees, no argument there.  Without diving into details, this is not a traditional employee/employer relationship.  If this were to fall under ERISA, it could cost 7-9 figures, countless hours to fix, and an ungodly amount of work.  

[MoJo]

1 hour ago, JWRB said:

MoJo, I know it's goofy all around.  I'm not arguing that it's lack of compliance with ERISA is damning, I'm looking for something de facto and that, no, this cannot fall under ERISA.  I'm extremely troubled that a plan where noone has autonomy over it can be both under ERISA and forced to operate until its exhausted.  That just runs contrary to what I think the intent behind ERISA was.

 

Um.  Just spent the last hour dealing with "abandoned" plans.  No employer.  No remaining "fiduciary" and yet they still seem to be "ERISA" covered plans.

You say the plan isn't an "employee" benefit plan and yet you say if you are are "employed" for the requisite period, you get the benefit.  You say the plan is "maintained" by the trustees, and yet you say it's not "maintained."  You say it wasn't established by the "employer" and yet you say it was funded by "stock."  Who owned the "stock" (owners of the "employer"?)  Is it "employer" stock or simply other investments?  I'm guessing people "associated" with the "employer" set it up, and they may be deemed to be "agents" of the employer (at least in the DOL's eyes) - and it wasn't just some "disinterested" party (gee, I wonder if Warren Buffet would contribute stock to a trust to pay me a pension when I retire even though I don't work for one of his companies...).  Who pay's taxes on the trust's income?  Is there a 1041 Fiduciary Tax Return filed? 

I think there is no doubt that this isn't a "qualified" plan (if it were, it'd be "disqualified") but that doesn't mean it still isn't ERISA covered. I think all of the above are factors to consider, but I stand by the premise that it's ERISA covered (since it benefits employees) unless an exemption exists.

[JWRB]

1 minute ago, MoJo said:

Um.  Just spent the last hour dealing with "abandoned" plans.  No employer.  No remaining "fiduciary" and yet they still seem to be "ERISA" covered plans.

You say the plan doesn't cover "employees" and yet you say if your are "employed" for the requisite period, you get the benefit.  You say the plan is "maintained" by the trustees, and yet you say it's not "maintained."  You say it wasn't established by the "employer" and yet you say it was funded by "stock."  Who owned the "stock" (owners of the "employer"?)  Is it "employer" stock or simply other investments?  I'm guessing people "associated" with the "employer" set it up - and it wasn't just some "disinterested" party (gee, I wonder if Warren Buffet would contribute stock to a trust to pay me a pension when I retire even though I don't work for one of his companies...).  Who pay's taxes on the trust's income?  Is there a 1041 Fiduciary Tax Return filed? 

I think there is no doubt that this isn't a "qualified" plan (if it were, it'd be "disqualified") but that doesn't mean it still isn't ERISA covered. I think all of the above are factors to consider, but I stand by the premise that it's ERISA covered (since it benefits employees) unless an exemption exists.

I 100% agree with your skepticism.  Let me deal with it point by point:

• They're employees, but I don't believe them to be employees covered by ERISA.  I can't divulge those facts, unfortunately.
• Maintained in the sense where there are trustees, but I don't think they're doing much of anything.  I don't have all of the information on administration, but I know that not much occurs.  But I will admit it's being "maintained" in the traditional sense by trustees.
• The plan was funded with stock in a related company; the company whose stock was in the plan was not an employer in the plan.  It was most definitely established by an employer, just not all employers (nor formally adopted to the best of my knowledge)
• I don't know about the trust income and 1041.

I think it falls out of ERISA for a multitude of reasons.  I'm just looking to bolster my argument by poking as many holes as I can.  I'm running down a lot of paths right now; finding out that one is fruitless is just as good as getting a helpful argument.  

I really appreciate your help.

[MoJo]

30 minutes ago, JWRB said:

I 100% agree with your skepticism.  Let me deal with it point by point:

• They're employees, but I don't believe them to be employees covered by ERISA.  I can't divulge those facts, unfortunately.
• Maintained in the sense where there are trustees, but I don't think they're doing much of anything.  I don't have all of the information on administration, but I know that not much occurs.  But I will admit it's being "maintained" in the traditional sense by trustees.
• The plan was funded with stock in a related company; the company whose stock was in the plan was not an employer in the plan.  It was most definitely established by an employer, just not all employers (nor formally adopted to the best of my knowledge)
• I don't know about the trust income and 1041.

I think it falls out of ERISA for a multitude of reasons.  I'm just looking to bolster my argument by poking as many holes as I can.  I'm running down a lot of paths right now; finding out that one is fruitless is just as good as getting a helpful argument.  

I really appreciate your help.

Pretty much everything you provide leads me to the opposite conclusion.

1) "Employees" is a factual determination.  If they work for the employer, they are employees covered under ERISA.  ERISA makes no distinction among those "covered" under it and those not covered under it (with the exception of sole proprietors covering only themselves and a spouse).  If they meet the common-law definition, then they are employees for ERISA purposes.

2) Maintained is really not a precursor to ERISA coverage (hence my quip about "abandoned" plans).  If it was establish by an "employer" (again, a factual determination, and maintenance of it was delegated to others, it was established and maintained.  It was "established" and it still is in "existence" so it is being "maintained.  Keep in mind a "trust" is a separate legal entity that has an existence for so long as it's purpose is still applicable.  Here, that appears to be the case.

3) "Related" company causes me even more concern.  So, people associated with multiple employers that were "related" took stock (presumably that they owned or controlled) and used it to fund a "benefit" for "employees" of another "employer", and essentially created an "employee benefit plan" - which, unless exempt is covered under ERISA.  Keep in mind that companies don't "do things" on their own.  They need "people" to do things as their agent.  If those who establish this "scheme" did so as "agents" of the employer, that would make the establishment of it an "employer" undertaking.

4) If the trust is operating as a potentially "tax exempt" entity (remember, the trust is an entity unto itself) then that actually makes the problem bigger.  It could then be a failed attempt to be a "qualified" plan that never complied.  As a non-qualified plan, or as an entity that you say is not an employee benefit plan covered under ERISA, then there are either tax consequences to the employer (as the grantor of the trust), or to the trust itself, for which a 1041 is required (and possibly state equivalents).  I understand you may not have that fact, but it is something that could help (or hurt) your argument.

As I've said, factors to consider, but as an "employee benefit plan" (and it seems to be one), it is covered by ERISA unless exempt.  So far, you seem to be concentrating on it not being an "employee benefit plan" but it was established by (agents of) the employer, for the benefit of employees, and is being maintained as intended (whether the "employer" has much control over it or not).

[JWRB]

10 minutes ago, MoJo said:

Pretty much everything you provide leads me to the opposite conclusion.

1) "Employees" is a factual determination.  If they work for the employer, they are employees covered under ERISA.  ERISA makes no distinction among those "covered" under it and those not covered under it (with the exception of sole proprietors covering only themselves and a spouse).  If they meet the common-law definition, then they are employees for ERISA purposes.

2) Maintained is really not a precursor to ERISA coverage (hence my quip about "abandoned" plans).  If it was establish by an "employer" (again, a factual determination, and maintenance of it was delegated to others, it was established and maintained.  It was "established" and it still is in "existence" so it is being "maintained.  Keep in mind a "trust" is a separate legal entity that has an existence for so long as it's purpose is still applicable.  Here, that appears to be the case.

3) "Related" company causes me even more concern.  So, people associated with multiple employers that were "related" took stock (presumably that they owned or controlled) and used it to fund a "benefit" for "employees" of another "employer", and essentially created an "employee benefit plan" - which, unless exempt is covered under ERISA.  Keep in mind that companies don't "do things" on their own.  They need "people" to do things as their agent.  If those who establish this "scheme" did so as "agents" of the employer, that would make the establishment of it an "employer" undertaking.

4) If the trust is operating as a potentially "tax exempt" entity (remember, the trust is an entity unto itself) then that actually makes the problem bigger.  It could then be a failed attempt to be a "qualified" plan that never complied.  As a non-qualified plan, or as an entity that you say is not an employee benefit plan covered under ERISA, then there are either tax consequences to the employer (as the grantor of the trust), or to the trust itself, for which a 1041 is required (and possibly state equivalents).  I understand you may not have that fact, but it is something that could help (or hurt) your argument.

As I've said, factors to consider, but as an "employee benefit plan" (and it seems to be one), it is covered by ERISA unless exempt.  So far, you seem to be concentrating on it not being an "employee benefit plan" but it was established by (agents of) the employer, for the benefit of employees, and is being maintained as intended (whether the "employer" has much control over it or not).

Haha fair response.  I'm liking this point by point thing, so let's keep it going:

1) I'm dropping this one, not because I disagree, but because I can't give you all of the facts.

2) I agree that the plan was established and is maintained.  My concern is with both forcing employers to participate and noone having the ability to amend/terminate the plan.  

3) Right, I'm not arguing that individuals didn't perform the actions of funding the plan.  Suffice to say that the employer whose stock is in the plan in no way could be an employer of the plan.

4) I definitely need to look into this; thank you for bringing it to light.

I know it's completely unfair of me to attempt to hold a discussion while withholding facts.  The help and discussion have been tremendous so far, so thank you for that.  This is the wonkiest case I've ever dealt with. 

[JWRB]

Also, on everything I posted about, I do not have a conclusion.  I merely have gut reactions and assumptions; I'm looking for a concrete resolution either way, even if it doesn't agree with me.

[MoJo]

11 minutes ago, JWRB said:

I know it's completely unfair of me to attempt to hold a discussion while withholding facts.  The help and discussion have been tremendous so far, so thank you for that.  This is the wonkiest case I've ever dealt with. 

Wonkiest?  Yea.  My "wonkiest" was the case of the owner of a business who had a sick employee, and he stood up at the company Xmas party to announce that he set aside $30,000 in a fund to cover otherwise uncovered medical expenses.  When he sold the company 10 years later, it was uncovered, and I had to go back and prepare years of Forms 5500, craft appropriate documents, and shut it down, all within about a week before closing.

Wonky is both fun and frustrating....

[JWRB]

Just now, MoJo said:

Wonkiest?  Yea.  My "wonkiest" was the case of the owner of a business who had a sick employee, and he stood up at the company Xmas party to announce that he set aside $30,000 in a fund to cover otherwise uncovered medical expenses.  When he sold the company 10 years later, it was uncovered, and I had to go back and prepare years of Forms 5500, craft appropriate documents, and shut it down, all within about a week before closing.

Wonky is both fun and frustrating....

Ok you win haha. That's awful.

[MoJo]

3 hours ago, JWRB said:

Ok you win haha. That's awful.

I'm not sure that's winning... and if it is, I'd rather lose!

Keep us posted on progress/outcome....