Misclassification Of Pension Plan Leads To ERISA Exposure

The Charlotte, North Carolina-based Atrium Health nonprofit corporation is the target of a lawsuit over its status under the Employee Retirement Income Security Act (ERISA).

The suit, brought by former Atrium employees, alleges in federal court that Atrium incorrectly identifies as a "government entity" in order to exempt itself from legal protections for participants in the company's pension, 401(k), and health care plans.

The plaintiffs allege this exemption threatens the health care and retirement benefits of more than 65,000 Atrium Health employees by decreasing the security of the system's retirement and health care benefits and by forcing participants to pay more than they should. The plaintiffs further allege the government plan exemption allows Atrium to participate in activities that would be barred for plans governed by the Act.

The plaintiffs allege Atrium is a health care giant trying to get away with spending money to expand its operations rather than on its employees. "Bogus 'government entity' claim by Atrium Health cheats employees on benefits, lawsuit says" www.beckershospitalreview.com (Nov. 20, 2018).


Commentary

ERISA does not apply to specific types of employer benefits plans such as “church plans” or “government plans.” A government plan is defined by United States Code § 414(d) and ERISA Section 3(32) as “a plan established and maintained for its employees by the Government of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing.”

Courts have broadly interpreted the definition of “government plan.” Many entities, believing they were not a “government plan”, have been found by courts that, in fact, they were. The opposite is also true: some companies, believing they are a government plan, may not, in fact be so. Part of the lawsuit against Atrium will be to determine whether it is a government plan or not.

Participants in an employer’s plan that is not covered by ERISA are allowed to sue an insurer under state laws for breach of contract, insurance bad faith, and punitive damages. These claims are not available under ERISA. Emotional distress damages and other damages caused by an insurance company’s bad faith may be recoverable in a state law governed claim but are not recoverable in ERISA cases.

That said, when ERISA applies, employers do not have to file certain annual reports, pay certain premiums, give requisite notices regarding future benefits, or satisfy a particular state’s fiduciary investing rules, which may be more stringent than those imposed by ERISA. For instance, the IRS requires the use of the prudent investor rule when investing plan assets. State law, on the other hand may restrict or prescribe permissible plan investments under more restrictive fiduciary investment rules.

The outcome of this Atrium lawsuit remains to be seen. In the meantime, any prudent board of directors should assure itself, with the help of legal counsel, that the organization is properly categorized under ERISA, especially in light of recent court decisions broadening the scope of the definition of a “government” plan.

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