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Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic Times

Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic Times

Employee Benefit Plan Review

September 17, 2009

The Supreme Court held that Varity was acting in both its capacity as an employer and as a plan fiduciary when it intentionally made misrepresentations to its employees about the security of their employee benefits.

The Supreme Court explained: “Reasonable employees could have thought that Varity was communicating with them both in its capacity as employer and in its capacity as the plan administrator.” Obviously, the Court’s use of the subjective “reasonable belief” standard in evaluating Varity’s actions blurs the distinction between when an employer is acting as an employer and when an employer is acting as a plan fiduciary.

Company officers who are also fiduciaries to employee benefit plans must be careful to identify when representations are being made as corporate officers and when their representations are being made as plan fiduciaries. In light of the Supreme Court’s holding in Varity ’, it may also be advisable for employers to not name the company as the plan administrator or as a fiduciary of its employee benefit plans in order to minimize the risk that company communications about business activities or proposed benefit changes may be characterized as misleading fiduciary communications.


What steps can an employer take to minimize the risk of being sued in connection with a reduction in an employee benefit arrangement?

Can an employer require an employee to sign a release of all claims as a condition for participation in an early retirement plan incentive plan funded out of the plan’s own assets? The U.S. Supreme Court answered, “yes,” in Lockheed Corp. v. Spink.

It found that Lockheed Corp. did not violate ERISA when it amended its pension plan to provide enhanced early retirement benefits on the condition that the employees sign a complete release of all claims to participate. The court reasoned that neither the employer nor its board of directors, as plan sponsors, acted as ERISA fiduciaries when they amended the plan.

Under the amended plan, eligible Lockheed employees were offered increased pension benefits paid out of surplus plan assets.

A class of retirees sued, challenging the early retirement plans, particularly with regard to the feature that benefits were available only to employees who signed a complete release of all employment- related claims.

They contended these acts were breaches of ERISA’s requirements that plan assets be used exclusively for the purpose of providing benefits and violated fiduciary obligations. In particular, the participants argued that the amendments, which offered increased benefits in exchange for a release of employment, constituted a use of plan assets to “purchase” a significant benefit for Lockheed and was not in the interests of participants and beneficiaries.

The Supreme Court disagreed, ruling that legitimate benefits that a plan sponsor may receive from the operation of a pension plan are attracting and retaining employees, paying deferred compensation, settling or avoiding strikes, providing increased compensation without increasing wages, decreasing employee turnover, and reducing the likelihood of lawsuits by encouraging employees who would otherwise have been laid off to depart voluntarily.

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