Question/advice regarding a paper on ERISA

[Redcloud]

I'm in law school writing a paper on ERISA, and I'm trying to work this out in my head. I'm thinking about the fiduciary duties of a plan administrator and how that coincides with possible discrimination backpay awards that may affect the plan. Possible scenario: hundreds or thousands of employees are discriminated against and part of being made whole again involves backpaying them, not only for their actual wages lost due to the discrimination, but monies lost from a benefit plan that they would of had if they were being paid the correct wage. Of course, this scenario is predicated on a plan that is funded based on the employee's salary. So, now the plan is possibly subject to backpay to make these employees whole again.

Another possible scenario: what about a group of employees who've been working for years with a company only to find out they have been discriminated against. Not only have they not received their proper wage but they don't have as much money in their plan as they should because their contribution was based on their salary. Over the course of years, given interest, this adds up. How would a situation like this be handled when trying to make the employee whole again?

How are premiums calculated in a retirement plan? Do most plans already account for any possible retroactive relief or harm to the plan? 

Possible Thesis:

Under ERISA, a plan administrator should have a fiduciary duty to mitigate damages to the plan when an employee files an EEOC charge alleging discriminatory practices by the employer that could result in a retroactive relief being awarded to the employee.

I'm not sure if I have anything here, or if any of this is plausible or relevant. Any advice/comments are more than welcome to help me narrow this down. Thanks, everyone!

[Peter Gulia]

For Temple University’s law school, I teach (now going on 11 years) a specialized course on ERISA Fiduciary Responsibility.  I teach it, and my summer-semester course on Professional Conduct in Tax Practice, as writing courses.  Beyond my courses, I’ve served as consulting or reviewing faculty on papers for others’ courses or for independent-writing projects.  I have experience with help a student choose and refine a topic, and plan how to research it.

If doing so doesn’t interfere with anyone in your school’s faculty, I’d be glad to converse with you to help you discern whether your idea would research and write effectively to fulfill your course’s or project’s purpose.

Also, I can tell you about (at least) two big cases you likely would want to consider in your research.

[Bill Presson]

Redcloud, you better take Peter up on this.

[Redcloud]

Professor Gulia, I will be in touch very soon. Thank you!

[CuseFan]

Agreed.

It's an interesting premise. I'm curious that you say "discrimination" but don't specifically say what kind(s), as there are all sorts and successful litigation often results in damages that may or may not be considered retroactive pay. And the assertion of hundreds of thousands of employees sounds more to me like misclassification of employees as independent contractors, which is entirely different. Many retirement plans that (mis)classify EEs as ICs are still able to legally exclude them from participation if subsequently determined to be common law employees, subject to compliance with other requirements on coverage and nondiscrimination.

Regardless, I'm sure Peter can steer you in the proper direction.

[ESOP Guy]

I am a CPA not a lawyer.   Also, I realize this is for a paper as such it is more hypothetical than anything else.   You also don't say what kind of benefit plan.

Within those caveats.....

If this is a 401(k) plan or a lot of Profit Sharing plans as a practical matter what you are talking about is very likely chump change in my opinion. 

Let's just say the person discriminated against was due $10k/year more if they had not been discriminated against.   A very large number of company's 401(k) plans match is 50% of the first 6% or 3% of pay.   That is a whole $300/year.   Over 10 years a whole $3000 vs the $100,000 of lost wages.  If this was me I would want my lawyer focusing on the lost $100,000 not the $3,000.  

All you could claim you lost in being able to defer your wages into the 4k plan is tax free earnings which once again doesn't seem big as I am assuming you get back earnings on the back wages.  So the benefit lost is the tax free part.   Still chump change on the grand scale.  

Now if it is a DB plan I could see this being bigger as it would effect a life time annuity but they are pretty rare form of plan any more.  There are some richer DC plans that this could be real money.

I guess over a large group it could add up if the lawyer is getting 20%-30% of total recovery as his fees it become a big deal for the lawyer! 

Maybe I am being too much a CPA.  I get fiduciary duties and understand this is a paper but as a practical matter I don't seeing this being a close to a big deal  I am sure on this board someone will tell me I am wrong and why- part of why I like this board! 

Yes, take up Peter's offer.  

[Peter Gulia]

Bill Presson, thank you for the vote of confidence.  CuseFan and ESOP Guy, thank you for contributing ideas I can use to help guide the student.

Moments after Redcloud’s post, we had a productive conversation about a still-in-development research topic.  Redcloud’s first imagination might include some mistaken assumptions, and the hypo or research question might change a few times before Redcloud’s professor approves an outline.

Consider also that different pension professionals might work with quite different sizes.  An employee-benefits lawyer’s work often focuses on situations that involve tens or hundreds of thousands of participants.  Or, as in most of my experience, with systemic processes used for millions of participants.

[RatherBeGolfing]

I'll throw another twist into this scenario.  

How are the employees compensated for this "backpay"?  

Isn't it usually an award rather than compensation for the services actually performed?  That is an important distinction to make, as compensatory damages would not be compensation for qualified plan purposes, and lost benefits should have been considered when the award was calculated.

[EBECatty]

25 minutes ago, RatherBeGolfing said:

I'll throw another twist into this scenario.  

How are the employees compensated for this "backpay"?  

Isn't it usually an award rather than compensation for the services actually performed?  That is an important distinction to make, as compensatory damages would not be compensation for qualified plan purposes, and lost benefits should have been considered when the award was calculated.

Per 1.415(c)-2(g)(8): Back pay. Payments awarded by an administrative agency or court or pursuant to a bona fide agreement by an employer to compensate an employee for lost wages are compensation within the meaning of section 415(c)(3) for the limitation year to which the back pay relates, but only to the extent such payments represent wages and compensation that would otherwise be included in compensation under this section.

Hours of service also includes hours for which employees are awarded back pay.

[RatherBeGolfing]

1 hour ago, EBECatty said:

Per 1.415(c)-2(g)(8): Back pay. Payments awarded by an administrative agency or court or pursuant to a bona fide agreement by an employer to compensate an employee for lost wages are compensation within the meaning of section 415(c)(3) for the limitation year to which the back pay relates, but only to the extent such payments represent wages and compensation that would otherwise be included in compensation under this section.

Hours of service also includes hours for which employees are awarded back pay.

Thanks!

[Luke Bailey]

Redcloud, the conventional (and probably correct) answer to your question is that contributions are a "settlor" function and do not entail fiduciary duties. So the plan administrator (which will likely be the employer or someone aligned with the employer) should simply desire to see that any contributions due the plan are made. The dispute regarding backpay would be separate, and the plan would just follow whatever the decision would be in the discrimination case. If there was a recovery that led to a higher contribution obligation, so be it.

[Peter Gulia]

Redcloud (if you’re still reading this), Luke Bailey’s points are well taken.

Our first conversation mentioned the legal distinction between an employer’s business decision-making and a plan administrator’s fiduciary responsibility, and a case that involved the distinction.  (And we discussed another case that led to a big shift on how plans’ sponsor specify an essential provision of an employee-benefit plan.)

I doubt your course on employment discrimination has even mentioned ERISA’s distinction between “settlor” and fiduciary decisions.  We could cover it when we look at your draft of your outline.

Thinking about how the terms of a negotiated settlement in an employment-discrimination case could affect obligations to or under not only retirement but also health and other employee-benefit plans might be an aspect of the employer’s and the plaintiffs’ negotiating positions.

And once there is a judgment or settlement, some aspects of implementing it might come into a plan administrator’s fiduciary functions.

Let’s check-in when you’re ready.

[Redcloud]

ESOP Guy, I greatly appreciate your viewpoint as an accountant. I am by no means an accountant, but your point of "chump change" is well taken, and that had crossed my mind. I appreciate someone with the accounting expertise chiming in on that.

Luke Bailey, as Professor Gulia alluded to, I am not aware of the distinction between "settlor" and fiduciary decisions.

Professor Gulia, I will be in touch.

All, thank you so much for your thoughtful comments and contributions to this post. You all are incredibly smart, and I'm incredibly grateful.

[AKowalski]

Suppose that an employee was terminated for discriminatory reasons, and they ultimately agree to a settlement agreement that provides for backpay. The implications of that backpay for different kinds of employee benefit plans can be complex. Keep in mind that ERISA broadly preempts state law, so a judge applying state discrimination law cannot simply order that a portion of the proceeds be contributed retroactively to a 401(k) plan or create service credits under a pension plan. In addition, the parties cannot simply contract around hard legal limits that apply to the amounts that may be contributed to a plan in a given year or the amount of benefits that may be payable therefrom. As I recall, the regulations under those legal limitations do not all expressly address backpay, which can raise a number of complications. If the participant is no longer employed, then they may have no current-year compensation from the employer beyond the backpay award itself. Can they contribute to a 401(k) plan in the current year? Can they contribute retroactively? Does their backpay award count under the plan's definition of compensation even if it could legally be taken into account? Etc. 

Personally, as a policy matter, I think that if someone was wrongfully terminated or denied compensation, and they had a standing election to contribute a percentage to a 401(k) plan (or were subject to an default contribution provision), then a portion of their backpay award should be retroactively contributed to the plan (or if there was no standing election or default, it would make sense to pull in an arbitrary percentage, e.g., from the missed deferral correction rules in EPCRS). But legally, it is tricky (if possible at all) to get there.

As a practical matter, a plan sponsor can avoid most of these questions by negotiating a cash-only award, or an award that provides for only current-year contributions to the plan that do not exceed current-year limitations (or interpreting a vague award to mean something that is clearly permissible). But the participant is potentially taking a permanent tax hit, and it's not always a clean result. 

[Luke Bailey]

7 hours ago, Redcloud said:

Luke Bailey, as Professor Gulia alluded to, I am not aware of the distinction between "settlor" and fiduciary decisions.

So Redcloud, you have an interest in ERISA, which is interesting, but I don't know if you have yet taken Estates and Trusts. ERISA is built on trust law, which has turned out to be an unruly intrusion of an area of law developed in England to preserve family wealth into what would otherwise be the contractual relationship between employer and employee or, as better known back in merry old England, between "master and servant." But I digress.

Anyway, say I am some wealthy British landowner centuries ago and I want to put money in a trust to protect it from my sons' prospective wastrel children. No one is forcing me to do that, or telling me how much it has to be, etc. I am the "settlor" of the trust and free to do what I want. But once the money has gone into the trust, it belongs to the trust (really, to the beneficiaries, including those as-yet unborn), and the trustee must (a) guard the trust from incursions, even by me if I have second thoughts and think I put too much in the trust, and even though I appointed the trustee. But it is the trust's and beneficiaries', not the trustee's, money, so the trustee must be a fiduciary (i.e., show faith, "fides" if you like Latin, or "Fi" if you have any marines in your family), and that is essentially a standard where you must put others' (here, the trust's and beneficiaries') interests ahead of your own and protect them above all.

Google "Maldonado letter" and all will be revealed, Redcloud.

[Redcloud]

Luke Bailey, thank you for the explanation as I have not taken Trusts and Estates. So, if you will entertain me, I am going to attempt to put out there (at the expense of highlighting my ignorance even further) some additional thoughts to make sure I'm understanding (or not) what you're saying in conjunction with the "Maldonado letter."

The "settlor" is the one who makes and contributes to the plan. Once the money is there, the fiduciary is the one who protects the plan, even from the "settlor" as you pointed out. (Definitely familiar with the "Fi" as I am a former Marine from 2002-2006...Semper Fi!). 

So, (in considering the "Maldonado letter"), is it possible that an employer's discriminatory practices or operations that resulted in unequal wages could make the employer responsible (as a "settlor" function) to "bear the cost in the normal course of such employer's [discriminatory] business or operations," and therefore the employer must contribute to the plan in the event of a discrimination award that resulted in the employer owing an employee unpaid benefits that were paid directly to the plan. 

But, if it was a matter of the employer paying the employee directly (not the plan) for monies owed due to discrimination award because of unequal wages, then this could raise an issue with the plan fiduciary and whether monies owed, which is paid from the plan (not the employer or "settlor"), are a "reasonable administrative expense under 403(c)(1) and 404(a)(1)(A) of ERISA." I suppose, just to follow through on this thought: on one hand, this would not be a reasonable administrative expense because it is a payment being made for the employer's benefit when the employer should be bearing the cost given they were the one to discriminate; on the other hand, this would be a reasonable administrative expense because the payment is being provided for the benefit of the participants and beneficiaries.

Am I understanding the distinction between settlor and fiduciary duties and the different aspects that would be raised in those situations regarding a discrimination award/backpay scenario?

[Peter Gulia]

Redcloud, just for background, the attachment is one page from my coursebook; it cites the leading cases for the settlor doctrine.

Absent a court’s order, an employee-benefit plan’s administrator (or other fiduciary) administers the plan according to the plan’s governing documents.

A written plan has primacy.  Exceptions or variations are (i) ignoring a document’s provision to the extent that it is contrary to ERISA’s title I or title IV; (ii) ignoring or interpreting a provision to the extent that it is contrary to other Federal law; and (iii) interpreting a plan to include a provision ERISA’s title I or title IV commands.

A written plan often states or suggests answers to questions such as:

·           whether back pay counts in compensation, as measured for one or more purposes;

·           whether the plan counts hours of service (or other measure of service) attributable to one or more periods for which back pay was awarded; and

·           how such a measure of service relates to measures for eligibility service, accrual service, and vesting service.

A fiduciary’s duty to a retirement plan could include a duty to collect from an employer a contribution owing to the plan.

A fiduciary’s duty to an uninsured (“self-funded”) health plan could include a duty to obtain an employer’s payment of a benefit the plan provides.

ERISA Fiduciary Responsibility settlor doctrine.pdf

[AKowalski]

The payment of benefits is generally not thought of as an "administrative expense", but rather the core function of the plan. Administrative expenses are secondary expenses that are reasonably necessary to collect, protect, invest, and pay out plan assets in accordance with the terms of the plan. 

The key distinction here is that the plan itself is generally not a party to discrimination litigation (the employer in its settlor capacity likely engaged in the discrimination and incurred the liability), so the award of backpay does not directly create an obligation of the plan. Once the money is in the plan, it is subject to fiduciary discretion and control (subject to the terms of the plan document, the requirements of ERISA, etc.). But until then, the funds belong to the employer in a settlor capacity, and a "settlor" decision to contributed the money to the plan still must be made (which is itself subject to certain limitations). 

One of the harms that is alleged as a result of the discrimination may be that the participant was not able to contribute to the plan and thus missed out on tax-advantages. The employer (again, wearing a "settlor hat") could make the participant whole by giving them not just the missed compensation, but also a small gross-up payment to account for the value of the lost tax advantages. But from the perspective of the participant and employer collectively, the best option would be one in which the tax advantages aren't lost in the first place--i.e., the backpay can somehow make its way into the plan. But that is subject to hard legal limits and the terms of the plan document.

If you are interested, Groom has a great chart regarding which expenses can be charged to a plan (i.e., fiduciary expenses) v. those that must be born by the plan sponsor (i.e., settlor expenses). https://www.groom.com/wp-content/uploads/2017/09/1114_Paying_Employee_Benefit_Plan_Expenses_Chart.pdf

[Luke Bailey]

Redcloud, I think RatherBeGolfing was pointing down the right path. The key is whether the plan (and it likely does) says that you have to include the backpay as wagers/compensation for a prior period. That will typically increase the offended employee's plan benefit, which will be a collateral benefit of the backpay.

[Peter Gulia]

For everyone who graciously contributed to this discussion:

After another conversation with me today, the JD student will refocus the paper’s topic to how a plaintiff’s attorney should recognize employee-benefits secondary effects of the lost employment or lower wages, and in settlement negotiations should seek more value to compensate the harmed worker for could-have-been retirement contributions and growth that an award of back pay alone might not completely restore.

We thank you for your good help.

[Redcloud]

Just to echo Professor Gulia, much thanks to everyone who took the time to contribute and help guide me in this endeavor. I am very humbled to have spoken amongst individuals of such high regard in this profession. 

[Luke Bailey]

Great to hear, Redcloud. Good luck with the article.

[ESOP Guy]

So you are going to see if you can find a way to turn the chump change into real money?   😁

[Redcloud]

Thank you, Luke Bailey. I'm looking forward to working on it.

ESOP Guy, I wasn't sure if you were still reading, but I'm glad you jumped back on. I meant what I said about your point of "chump change," and I have given this some thought. At the end of the day, you're right: it certainly is chump change. My only rebuttal or push back would simply be that the entire point of back pay, per the Courts, is to make the employee whole. In that vein, three grand is three grand. Though it may pale in comparison to the hundred grand in wages (using your example), it's still part of the equation, and without it, the employee technically would not be whole.

[Luke Bailey]

1 hour ago, Redcloud said:

At the end of the day, you're right: it certainly is chump change.

Worked on a case once, not ERISA. Municipality. Involved what overtime pay was required. Affected hundreds of employees over several years. Not chump change.