ERISA & Pensions: Court Clarifies the Reach of ERISA

In a ease greeted with enthusiasm by the insurance industry, the U.S. Circuit Court for the Third Circuit Court of Appeals clarified the reach of the federal Employee Retirement Income Security Act (“ERISA”) in its recent decision in Leckey v. Stefano, 263 F.3d 267 (3d Cir. 2001). Following Leckey, even if all of the participants in a profit-sharing or pension plan are immediate family members and part-owners of the company, such plans are now considered within the ambit of ERISA provided the company is not entirely owned by a single person or married couple.

Background of ERISA

Enacted by Congress in 1974, ERISA provides a comprehensive federal regulatory scheme governing employee welfare benefits plans and employee pension benefit plans. ERISA establishes uniform standards of reporting, disclosure, and fiduciary responsibility. The Act also imposes on pension plans a variety of substantive requirements relating to minimum participation, and vesting, funding, and plan termination.

Advantages of ERISA Plans

The United States Supreme Court has held that remedies provided in ERISA for violation of the Act’s provisions are exclusive. Accordingly, the remedies provided under ERISA supersede and preempt any remedies that might otherwise be available to participants or beneficiaries under state contract or tort law. Practically speaking, ERISA’s broad preemption substantially limits the liability and exposure of plan administrators by, among other things, eliminating claims for punitive, extra-contractual, and bad faith damages. In view of these protections, it is easy to see why ERISA defendants greet the expanded breadth of ERISA preemption with enthusiasm.

The Third Circuit’s Decision in Leckey

Leckey arose out of an alleged unauthorized distribution by a president of a family-owned business from a pension and profit-sharing plan. The plaintiffs in Leckey were the president’s widow and stepdaughter, who alleged that the president made various unauthorized withdrawals from the company’s pension trust during his life without obtaining the con sent of his wife, in violation of ERISA. At issue was whether the plan was an ERISA plan, where the regulations promulgated under ERISA excluded those plans under which no employees were participants covered under the plan. In determining whether there are covered employees under the plan, the ERISA regulations provide that an individual and his or her spouse are not deemed to be employees where the business is wholly owned by the individual or by the individual and his or her spouse.

Relying on the Third Circuit’s prior decision in Matinchek v. John Alden Life Ins. Co., the District Court concluded that ERISA coverage did not extend to plans covering joint owners who are immediate family members. Because the only participants in Leckey were two related co-owners -- the president and his stepdaughter -- the District Court concluded that there were no non-owner employees of the plan. Thus, the lower court held the plan was not covered by ERISA.

The Third Circuit reversed the District Court, finding that it misread Matinchek. The Third Circuit noted that although a sole owner (or married couple who jointly own a company) cannot be considered employees, such was not the ease in Leckey. In Leckey, the part-owner of the business was a stepdaughter, not a wife. The Third Circuit ruled that because the stepdaughter and president were not spouses, they could be counted as employees, even though they were also owners.

Although grounded in a semantic distinction, the Third Circuit’s decision in Leckey has far-reaching effects. Now included within the ambit of ERISA are all those profit-sharing and pension plans of family-owned businesses, arguably excluded under Matinchek, that have at least one owner/family member who is not a spouse. Stated differently, although part-owners, immediate family members may now be counted as employees for purposes of determining whether a plan is covered by ERISA, so long as the company is not entirely owned by just a single person or married couple.

Andy Susko ((215)864-6228 or suskoa@whitewms.com) and Liz Venditta ((215)864-6392 or vendittae@whitewms.com) are partners who concentrate in the defense of insurers and self-insureds in life, health, and disability litigation, including ERJSA benefits litigation. Ed Koch ((215)864-6319 or koche@whitewms.com) practices in the US. Circuit Court of Appeals for the Third Circuit and other appellate courts as part of the Appellate Practice Group.

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