Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
40 Cards in this Set
- Front
- Back
|
Common Law of Trusts
|
A fiduciary relationship exists upon receipt of certain powers or property along with a duty to use them for the benefit of another (or others).
A trust is a formal fiduciary relationship concerning property (the trust assets) the obligations of persons (trustees) who hold that property to perform certain duties on behalf of others (beneficiaries). • Duty to see that the property is legally designated as a trust • Duty to refrain from delegating trustee powers • Duty of undivided loyalty to the beneficiaries • Duty to invest prudently to maximize return and ensure safety of the trust assets |
|
|
Duty of Loyalty
|
Trustee’s duty to act solely in the interest of the trust (and its beneficiaries)
Higher level of duty than just honesty; must resolve all conflicts in favor of trust |
|
|
Duty of Prudence
|
Prudent man rule under common law.
Per American common law of trusts, duty of prudence interpreted as: Duty to manage assets as a person using ordinary care would invest his own personal estate. Too flexible and vague to enforce, whether for entire portfolio or individual assets. |
|
|
Exclusive Benefit Rule under IRC
|
Tax-qualified employee benefit pension plans offer tax advantages to contributing sponsors & participants
Tax advantages require adherence to IRS rules, generally follow the common law of trust principles • Must operate for the exclusive benefit of plan members • Purpose of any contributions must be for eventual distribution to participants & their beneficiaries • Cannot be diverted for other purposes |
|
|
Fiduciary Standards under ERISA
|
In early 1970s, 35 million workers relying on $130 in uninsured pension assets
Congress through ERISA established safeguards to ensure the adequacy to pay promised benefits **ERISA set standards of plan fiduciary conduct, responsibility and obligation **Also provided remedies, sanctions, and access to the courts for enforcement of the standards |
|
|
ERISA Objectives in terms of EE Benefit Trusts
|
• Uniform legal culture of fiduciary duties would develop through federal courts’ interpretation of ERISA on a case-by-case basis. This would supercede state-level common law of trusts.
• ERISA fiduciary standards would be clarified & modified with pension funds in mind • Plan beneficiaries would have liberal access to federal courts, including holding fiduciaries personally liable for breaches. • Plan fiduciaries would be subject to ERISA, even if they did not utilize a trust |
|
|
Sole Benefit Standard
|
Stated in the Labor Management Relations Act, combined with IRC exclusive benefit rule by ERISA
Fiduciary must act solely in the interest of plan participants & beneficiaries, for the exclusive purpose of providing benefits and defraying reasonable administrative expenses. **Rigid, complete and undivided loyalty to act for plan trust and no other motivations. |
|
|
Prudent Expert Rule
|
Fiduciary must act with the care, skill, prudence and diligence under the circumstances then prevailing
that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character with like aims; expects expert handling. **(Under common law prudent man standard, only ordinary prudence had been required. See A 2) Common law had only expected assets to be handled as fiduciary would handle his own ERISA requires acting with knowledge of how similar plans in similar circumstances are managed |
|
|
ERISA Requirements
|
• Investment like similar plans in similar circumstances.
• Exercise of the skill of an expert in management of plans • Focus is not on performance of single investment, but contribution to overall portfolio When investing a pension plan portfolio, fiduciary weighs risk of loss against opportunity for gain. Consider: • Liquidity & current return of the portfolio relative to the liquidity requirements of the plan • Projected return of the portfolio relative to the funding objectives of the plan • Composition of the portfolio with regard to diversification; judge investments in context Standards are objective; good faith effort is not a defense for poor stewardship |
|
|
Diversification Rule
|
Under ERISA, a fiduciary is required to diversify plan investments to minimize risk of large losses, unless it is clearly prudent not to do so.
This resembles the fiduciary principle under common law of trusts (diversification rule) But no clear-cut test as to what constitutes appropriate diversification or unacceptable concentration. |
|
|
Plan Document Rule
|
Fiduciary must strictly follow the terms of written plan document (unless otherwise in violation of ERISA) and administer plan in a fair, uniform, and non-discriminatory manner.
Plan administrator’s decisions on benefit claims are normally deferred to by courts,unless there is a substantive issue raised as to whether: • Relevant terms of the plan are overly vague or ambiguous; • Plan document fails to expressly include provision stating that the courts should defer to the administrative decisions of the plan fiduciaries; or • There is an apparent conflict of interest and the fiduciary would be personally or institutionally affected by the benefit decision. |
|
|
Prohibited Transaction Rule
|
Fiduciary must not allow plan to engage directly or indirectly in transactions prohibited under ERISA. unless otherwise exempted (see below)
Prohibited transaction under ERISA occurs if fiduciary causes plan to engage in transaction with a party-in-interest (seller or buyer) that would constitute: • Sale or exchange, or leasing, of an property between the plan and a party-in-interest • Lending of money or other extension of credit between the plan and a party-in-interest • Furnishing of goods, services, or facilities between the plan and a party-in-interest • Transfer to or use by or for the benefit of a party-in-interest of any assets of the plan; or • Acquisition on behalf of the plan of any employer security or employer real property not otherwise specifically exempted by the law or regulation. |
|
|
Party-in-interest
|
Broadly defined to include nearly everyone who has a direct or indirect association with a plan.
Under ERISA prohibited transactions provisions, parties in interest specifically include: • Any plan fiduciary (e.g., administrator, officer, trustee, custodian) • A person providing services to the plan (e.g., legal counsel, plan employee, etc.) • Any employer or union (or other employee organization) whose employees/members are covered by the plan • Direct or indirect owner of 50% or more of the business interest that sponsors the plan • Certain relatives of any of the above • Employees, officers, directors and 10% shareholders of certain other parties-in-interest • Certain persons having a statutorily-defined direct or indirect relationship with other parties-in-interest. |
|
|
Prohibited Transaction Exemption
|
Plan fiduciary may apply to DOL for exemption in advance. Secretary of Labor may grant if:
• Administratively feasible • Demonstrably in the interest of the plan & its participants and beneficiaries, and • Otherwise protective of rights of plan participants & beneficiaries |
|
|
Who is a fiduciary?
|
ERISA defines plan fiduciary as someone who:
• Exercises any discretionary authority or control over the management of a plan (trustees, administrators) • Exercises any authority or control concerning the management or disposition of assets, or • Has any discretionary authority or responsibility in the administration of the plan. ERISA bases fiduciary status on a person’s function, authority and responsibility, not merely title or label. |
|
|
Fiduciary Status
|
Fiduciary status extends not only to those named fiduciaries in the plan document for express authority and responsibility re plan investment & management. Also covers persons who undertake to exercise any discretion or control over plan, regardless of their formal title.
Professional service providers acting within their roles and not exercising discretionary authority or control or providing investment advice for fees or other compensation are unlikely to be considered fiduciaries. May NOT hold fiduciary position if convicted of specified felonies within 5 years (later of conviction or imprisonment. If violate: up to $10,000 fine or 1 year in prison for named fiduciaries & others. |
|
|
Penalties for fiduciary breaches and prohibited transactions
|
Plan fiduciary who breaches ERISA requirements is personally liable for any losses resulting from breach.
**Liable for restoration to the plan of any profits realized by fiduciary through improper use of assets. Fiduciary who engages in prohibited transaction, fiduciary (as a disqualified person) subject to excise tax **15% of transaction amount payable to U. S. Treasury for each year (>8/5/97) transaction outstanding plus interest & penalties on the tax. **Excise tax increases to 100% of transaction amount upon failure to remedy upon notification. Secretary of Labor may also assess civil penalty under ERISA of up to 5% of amount involved for each year it continues, or 100% of amount if not corrected within 90 days of notice from Secretary |
|
|
Co-fiduciary Liability
|
A fiduciary is liable for breaches by other fiduciaries for same plan if:
• Knowingly participates in or undertakes to conceal an act of omission of co-fid (knowing such action constitutes a breach); • Imprudently fails to discharge his own fiduciary duties under the plan; or • Has knowledge of the co-fid’s breach and makes no reasonable effort under the circumstances to remedy the breach. |
|
|
Enforcement
|
Civil action brought in federal or state court by plan participant or beneficiary
Either individually or as a class action by Secretary of Labor or another plan fiduciary. |
|
|
Exculpatory Provisions
|
Plan document provision intended to relieve fiduciary from liability for breach is void under ERISA
|
|
|
Bonding Requirements
|
Must be bonded:
Every fiduciary of an employee benefit plan & every other person who handles plan funds/property • Plan must be named as the insured; and • Amount must be fixed at the beginning of each plan year as: ○ not less than 10% of the amount of funds handled ○ but at least $1,000 |
|
|
Further sanctions for breaches
|
In addition to personal liability to restore plan’s losses, fiduciary may also be liable for:
• Court-ordered attorney’s fees and costs incurred to remedy the breach; • Punitive damages awarded by the court; • Special damages in an amount equal to profits received by fiduciary resulting from wrongful use of plan assets; and • Mandatory assessment of a civil penalty of 20% of the amount recovered by Secretary of Labor on account of the fiduciary breach. |
|
|
Allocation of Fiduciary Responsibilities
|
Plan document may specify in writing that specific duties are allocated among the various fiduciaries.
**If properly noted in plan document, other fiduciaries would not be liable for a breach outside own duty **But still responsible for acting prudently and acting to remedy known breach. |
|
|
Transferring fiduciary responsibility to investment managers
|
OK if investment manager is duly appointed in writing in accordance with ERISA procedural requirements
Named fiduciary would still be liable for: • Imprudently selecting or retaining investment manager; or • Permitting, concealing, or failing to remedy a known breach of fiduciary responsibility |
|
|
Types of ERISA Litigation - Is this lawsuit subject to ERISA?
|
Only ERISA Plans are subject to ERISA lawsuits.
|
|
|
ERISA Plans
|
plan, fund, or program providing benefits described in ERISA if based on surrounding circumstances a reasonable person can ascertain all the following:
• Intended benefits • Class of beneficiaries • Source of financing, and • Procedures for receiving benefits If a pattern of benefits develops over time, an informal program can be considered an ERISA plan Insurance with employer funds or endorsement generally constitutes plan establishment ERISA plans must cover at least 1 common-law employee, not just partners or 100% owners, etc. **OK for ERISA plan to include partners and owners, as long as at least 1 employee is covered No funding requirements, but must have administrative procedures Exempted plans: church, certain church-run schools or hospitals, and public employers Purchase of insurance establishes a plan only if employer contributes to or endorses it ERISA plans can be welfare or pension plans, but not excess benefit plans or payroll practices Plans that only respond to workers or unemployment comp or disability laws are not ERISA |
|
|
Types of Claims: Claims for Benefits
|
Can be brought by participant or beneficiary
Definition of a participant or beneficiary under ERISA Participant = employee or former employee who is or may be eligible to receive benefit, or whose beneficiaries may become eligible to receive benefit Nonemployee (partner, owner) in ERISA plan is a beneficiary, can claim benefits Claim can be brought under ERISA for benefits due or to declare right to future benefits **Extra-contractual and punitive damages are generally NOT available. |
|
|
Types of Claims: Fiduciary Breach
|
Fiduciary may be sued by other fiduciary, Dept of Labor, participants or beneficiaries.
ERISA sec. 502(a)(3) “appropriate equitable relief” scope subject of various USSC opinions **Often from cases not involving participant claims or plan right to subrogation or recovery |
|
|
Types of Claims: Section 510
|
Non-retaliation, nondiscrimination provision:
**Employer can’t terminate employee to avoid benefit coverage or claims **Employer retains right to change plan design, even if adversely impacts employee/ group Class action problems if decision like plant closing or layoff is driven in part by benefit cost considerations, beyond general decision to reduce overall wage costs. |
|
|
Types of Claims: Multiemployer plan litigation
|
Normally brought by administrator or trustee vs. an employer for delinquent contributions
|
|
|
Types of Claims: Failure to provide notices required by ERISA
|
Penalty to 4110 per day for failure to provide documents, benefit statement, COBRA notices
|
|
|
Special Issues Arising out of Health Plan Litigation
|
i. Failures to provide COBRA coverage and/or notices
ii. Experimental treatment exclusions iii. Erroneous certification claims iv. Retiree health benefits – reduction or elimination |
|
|
Who Can Be Sued?
|
benefit Claims - sue plan itself, not fiduciaries. "Plan" may be self-funded sponsor or insurer.
Fiduciary Breach - sue fiduciaries. Section 510 - Sue individual who discriminated, not the plan. Failure to provide notices - Plan Administrator. TPA Issues - TPA is not fiduciary if the sponsor retains the right to make final decision on claims. If not fiduciary, cannot sue under ERISA. Damages under ERISA Section 502(a)(3) - Appropriate equitable relief: Mertens vs. Hewitt 1993: no recovery. 1996 Variety Corp vs Howe: limited equitable remedies |
|
|
Jurisdiction and venue
|
All ERISA claims must be filed in federal court, except benefit claims
**Complaint must be served on Secretary of Labor and Secretary of Treasury Benefit claims can be filed in state or federal court **Request for removal from state to federal court granted if < 30 days since served |
|
|
ERISA Exemption
|
ERISA preempts any state law relating to an ERISA plan
Broadly construed. State laws re insurance, securities, or banking are NOT preempted and apply to ERISA plans **Self-funded plans are not considered to be engaged in insurance or banking activity, so ERISA preemption applies to self-funded plans even in those areas. |
|
|
Conflict Preemption
|
express preemption provision
|
|
|
Complete or Field Preemption
|
preemption extends to laws which would interfere with enforcement
|
|
|
Statutes and limitations
|
Breach of fiduciary duty claims: 6 yrs from last breach or possible cure, or 3 yrs from knowing
Other claims under ERISA: refer to analogous state law |
|
|
Right to jury trial
|
Not usual in trust law, equity remedy. Uncommon, but ok if legal remedy.
|
|
|
Attorney Fees
|
General Rule: court may award to either party, looking at 5 factors:
• Degree of offender’s culpability or bad faith • Ability of offender to satisfy such award • Whether award would act as deterrent to other offenders • Degree to which the action benefited other plan participants • Relative merits of parties’ positions Mandatory fee awards per ERISA sec 515: Multiemployer plans to collect delinquent employer contributions or unpaid withdrawal liability **Court must award attorney fees, interest, and penalties if employer found at fault |
