Erisa and Disability Benefits Law Blog

The 3rd Circuit Court of Appeals recently had occasion to examine what constitutes a "top hat" plan under ERISA. In re IT Group, Inc., 2006 WL 1421016 (3rd Cir. 2006). These deferred compensation plans are subject to ERISA's administrative and enforcement provisions, but exempt from the substantive provisions that regulate plan funding and impose fiduciary duties.

The Court noted that ERISA defines a top hat plan as "a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees." The primary question before the Court in IT Group was what constitutes an "unfunded plan."

The Court stated that a plan is "unfunded" where the employer promises to pay the employee the deferred compensation at a specified time, but does not set aside the funds in an escrow, trust fund, or otherwise. In such a case, the assets used to pay the deferred compensation are the general assets of the employer and are subject to the claims of the employer's creditors. However, an employer may set aside deferred compensation amounts in a segregated fund or trust without jeopardizing a plan's "unfunded" status if the fund or trust remains "subject to the claims of the employer's creditors in the event of insolvency or bankruptcy."

Ultimately however, the 3rd Circuit found that the test for determining what constitutes unfunded status was largely undefined and a matter of first impression. The Court settled on the following two elements: (1) whether beneficiaries of the plan can look to a res separate from the general assets of the corporation to satisfy their claims; and (2) whether beneficiaries of the plan have a legal right greater than that of general, unsecured creditors to the assets of the corporation or to some specific subset of corporate assets. The Court also stated that it may also consider the plan's intended and actual tax treatment.

Applying these elements, the Court found that the Plan at issue was, indeed, an unfunded "Top Hat" plan under ERISA and therefore not subject to its substantive provisions.

Read the entire opinion here.

Very little about ERISA is simple. In fact, even the statute's numbering system is complicated. The ERISA statute was slated to be codified in Title 29 of the federal code. By the time Congress finally passed the statute in 1974, however, many section numbers of Title 29 had been assigned to other statutory provisions. To resolve this dilemma, ERISA's section numbers had to be reassigned to different Title 29 section numbers. ERISA § 502, for example, became 29 U.S.C. § 1132.

Many ERISA practicioners "speak ERISA" and refer to the original section numbers. Some case opinions and legal publications also refer to the ERISA section numbers, leading to confusion for the uninitiated. In any event, it's just another thing that makes this area of the law is a little more unusual.

There is a great cross-reference table, published on-line by BenefitsLink.com, that sets forth the matching ERISA and Title 29 section numbers. It also provides the full ERISA statute for easy reference.

Given the growing number of pension-fund defaults, including the recent $9 billion default by United Airlines, Congress is starting to take action. On June 30, 2005, the House Committee on Education and the Workforce passed a bill that seeks to reduce the number of pension defaults. According to a Washington Post story, the bill "requires corporations to use a new interest rate when measuring their future pension obligations; curbs increases in benefits promised from underfunded plans; increases premiums paid to the PBGC, the federal agency that insures pension plans; and enhances public disclosure of information about severely underfunded plans."

Committee Democrats argued that there were not allowed sufficient time to study the bill and thus voted "present." Amendments to the proposed legislation offered by Democrats were rejected by the Republican-controlled Committee.

The Employee Retirement Income Security Act of 1974 ("ERISA") is a complex federal statute that governs many types of employee benefits. Congress originally passed the ERISA law to preserve the integrity of pension plans. Over time, courts extended the scope of ERISA to cover other employee benefits, including disability coverage provided by insurance carriers.

ERISA has a huge impact on the way that disability claims are handled and decided. Judges decide ERISA cases based on the contents of the claims file. Trials, witnesses, and juries are usually not allowed. Likewise, punitive damages are not permitted. Instead, recoveries are limited to the denied disability benefits, along with attorney's fees and interest at the court's discretion.

Perhaps more importantly, ERISA disability claims are often decided under a legal standard that is favorable to insurance companies and plans. If the insurance policy contains certain language affording discretion to the carrier or plan to make decisions regarding disability, the court may be forced to decide the case under an "abuse of discretion" standard. Under that standard, the court generally will not overturn the denial of benefits unless the claimant demonstrates that the insurance carrier acted unreasonably or irrationally. On the other hand, if the policy does not contain the language affording discretion to the carrier or plan, then the more favorable "de novo" standard may apply. Under that standard, the judge will examine the claims file without giving the insurance carrier any benefit of the doubt. All other factors being equal, it is sometimes easier to prevail in a disability claim if the de novo standard applies.

An experienced ERISA lawyer can help you decide whether or not your claim is governed by ERISA and, if so, which standard of review applies. ERISA is a very complicated and rapidly evolving area of the law. Many claims are lost because claimants did not understand how to protect and pursue their rights without falling into one of the many, many traps presented by ERISA.