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The name of federal legislation, popularly abbreviated as ERISA (29 U.S.C.A. §1001 et seq. [1974]), which regulates the financing, vesting, and administration of pension plans for workers in private business and industry.

Beck v. Pace International Union

One of the protections of The Employee Retirement Income SecurityAct of 1974 (ERISA) is a requirement that private sector pension plan managers discharge their managerial duties solely in the interests of their plan participants and beneficiaries. In Beck v. Pace International Union, No. 05-1448, 551 U.S. ___ (2007), the U.S. Supreme Court held that bankrupt employer Crown Vantage Inc. (through its liquidating trustee, Jeffrey Beck) did not breach its fiduciary duty to plan participants and beneficiaries for failing to consider a merger with the labor union's plan, as one of its options when terminating the plans. This was true even though the company stood to retain a $5 million reversion after satisfying its obligations to plan participants and beneficiaries, by choosing a standard termination and purchasing annuities. The Court's decision was unanimous, reversing the Ninth Circuit Court of appeals

Crown Paper and its parent entity, Crown Vantage ("Crown") operated seven paper mills, employing approximately 2,600. PACE International Union ("PACE") represented employees covered by 17 of Crown's defined-benefit pension plans (under which retired employees were entitled to fixed periodic payments).

In March 2000, Crown filed for bankruptcy and began liquidating its assets. Under such circumstances, ERISA permits employers to terminate pension plans voluntarily, as long as the terminated plans have sufficient assets to cover benefit liabilities (a "standard termination"). As Crown explored the possibility of this option, PACE interjected itself into the discussions and proposed that Crown, instead, merge the plans (covering PACE union members) with PACE's own multi-employer pension fund, PIUMPF. Under this option, Crown would be required to turn over all plan assets to PIUMPF and PIUMPF would assume all plan liabilities. Crown took the offer under advisement.

AS Crown looked into annuity options, it discovered it had actually over-funded certain pension plans, so that converting them to annuities would allow Crown to retain an estimated $5 million. This money could be used toward satisfying its bankruptcy creditors after it had satisfied its obligations to pension plan participants and beneficiaries. Conversely, under the PIUMPF merger proposal, the $5 million excess would go to PIUMPF. Crown chose the annuities.

PACE then filed suit in federal district court. It claimed that Crown had breached its fiduciary duty to plan participants and beneficiaries under ERISA by neglecting to give adequate or diligent consideration to the proposed merger of plans with PIUMPF. The district court ruled in favor of PACE, and the bankruptcy trustee, Beck, appealed first to the district court, and then to the Ninth Circuit.

The Ninth Circuit affirmed in relevant part. Importantly, the court acknowledged that a decision to terminate a pension plan is generally a business decision not subject to ERISA's fiduciary obligations. Notwithstanding, the appellate court reasoned that the implementation of a termination decision was fiduciary in nature.

Writing for an unanimous Supreme Court, Justice Scalia reversed and remanded. The Court noted that it is well established that a decision by an employer to terminate an ERISA plan is a settlor rather than administrative function, not subject to ERISA's fiduciary obligations. Still, the Court did not totally dismiss the possibility that, under certain circumstances, a decision whether to merge plans could switch from being a settlor to a fiduciary function, since both options involve the transfer of assets and liabilities.

However, to find that a fiduciary duty was involved, the Court said it would have to find that the merger option was a permissible form of plan termination under ERISA.

To the contrary, the Court concluded that merger was not a method of termination. Timing played into its ruling. At the time PACE proposed the merger, Crown had already made a decision to terminate its pension plans; it was merely deliberating over whether to put the money into annuities.

Justice Scalia enumerated several other reasons why a "termination" under ERISA should not encompass mergers. They included the fact that terminating a plan through purchase of annuities formally severs the applicability of ERISA to plan assets. Moreover, the Pension Benefit Guarantee Corporation (PBGC), an independent governmental agency created under ERISA to protect pensions, would no longer be liable for deficiencies if the plan became insolvent. Also, risks associated with annuities related solely to the solvency of insurance companies and not to the performance of merged fund investments. Still another reason was that following a merger, merged plan assets could be used to satisfy the benefits liabilities of participants and beneficiaries other than those in the original plan. (The Court listed several more reasons.)

In summary, the Court noted that PBGC takes the position that ERISA does not permit merger as a method of termination of plans, because merger is an alternative to, rather than a form of, plan termination. The Court had historically deferred to the PBGC when interpreting ERISA, and now again, found PBGC's policy not only permissible and reasonable but more plausible. Termination by merger could have exposed plan participants and beneficiaries to more risks, with detrimental financial consequences.

Retail Industry Leaders Association v. Fielder

Many states have seen the cost of their medical assistance programs, including Medicaid, rise dramatically in the past five years. In analyzing why the costs have risen so sharply, states discovered that employees of Wal-Mart Stores, Inc. have ended up on public health programs. It has been alleged that Wal-Mart provides substandard health care benefits to its employees. As a result several states, including Maryland and California, have enacted "play or pay" laws that require large employers to either spend a specific percentage of their payroll on employee healthcare benefits or pay the amount that their spending falls short to a state healthcare fund. Wal-Mart, which has been the chief target of these laws, mobilized a trade association group made up of large corporations to challenge the Maryland law. The Fourth Circuit Court of Appeals, in Retail Industry Leaders Association v. Fielder, 475 F.3d 180(4th Cir. 2007), dealt a blow to these state efforts when it ruled that the federal Employee Retirement Income Security Act (ERISA) preempted the Maryland law. The court held that such state laws would undermine the national uniformity of employee benefit plans that Congress intended when it passed ERISA.

The Maryland legislature enacted the Fair Share Health Care Fund Act (Fair Share) in 2006 because state medical assistance costs had risen from $3.46 billion to $4.7 billion in just three fiscal years. It believed Wal-Mart, one of the four largest employers in Maryland, provided substandard employee healthcare benefits. Studies in Georgia and North Carolina supported this conclusion, demonstrating that substantial numbers of Wal-Mart employees and their children have joined public health programs. The legislature concluded that state tax dollars were subsidizing Wal-Mart. Therefore, Fair Share required employers with 10,000 or more Maryland employees to spend at least 8 percent of their total payrolls on employees' heath insurance costs or pay the amount their spending fell short to the state. Wal-Mart, which has 16,000 Maryland employees, was one of four employers covered by Fair Share. However, the other three employers did not feel the effect of the law for various reasons. Johns Hopkins University, a nonprofit corporation, was subject to a 6 percent contribution which it already satisfied. Giant Foods, which employed unionized workers, spent more than 8 percent on employee health insurance, while Northrup Grumman, a defense contractor, was eventually excluded from the program by legislative amendment. A corporation was also required to file an annual report disclosing its health care costs. If a corporation failed to make the required payment to the state for the difference between its health insurance costs and an amount equal to 8 percent of the total wages paid to employees, it could be subject to a $250,000 civil penalty.

Soon after Fair Share was enacted, and before it went into effect, the Retail Industry Leaders Association (RILA) filed suit against the state of Maryland. RILA, a trade association whose members include Best Buy Company, Target Corporation, Lowe's Companies, IKEA and Wal-Mart, alleged that Fair Share was preempted by ERISA. ERISA is an extremely complex and technical set of provisions that seek to protect employee benefit programs by preventing the states from regulating plan design and administration. This is particularly important for multi-state employers, who would incur increased costs if they were required to administer their plans differently in each state. Therefore, Congress included broad preemption provisions that prohibit states from regulating benefit employee plans. RILA alleged that Fair Share was exactly the type of scheme that ERISA was meant to prevent. If the courts failed to strike Fair Share other states would be emboldened to do the same. In time large employers like Wal-Mart would be spending time and money administering 50 different plans. The state countered that ERISA was not an issue because employers could choose to pay into the fund rather than modify their health insurance plans to increase spending. The federal district court sided with RILA, ruling that the Maryland law was preempted by ERISA.

A three-judge panel of the Fourth Circuit Court of Appeals upheld the lower court ruling on a 2-1 vote. Judge Paul Niemeyer, writing for the majority, found that Fair Share would undermine ERISA's goal to have national uniform administration of employee benefit plans. The Maryland "opt out" provision was not a meaningful option because "any reasonable employer" would choose to spend money on increasing employees' heath care, for to do otherwise would hurt employees' morale. The Fair Share reporting requirements also burdened employers by forcing them to alter their national administration plans. If Fair Share and other similar plans were permitted it would force employers to tailor their benefit plans to "each specific State, and even to specific cities and counties. This is precisely the regulatory balkanization that Congress sought to avoid by enacting ERISA's preemptive provision." Though Maryland might have had a "noble purpose," the law would have undermined ERISA's "foundational policy" and encourage other states and local governments to follow suit. Such laws were preempted by ERISA.

Judge M. Blane Michael dissented, arguing that the statute was not preempted by ERISA because employers could opt out and pay into the special fund. Congress intended for the states to find "innovative ways to solve the Medicaid funding crisis" and Fair Share was a legitimate response.