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When to include ERISA claims procedures in an employment agreement, with arbitration discussion.

by Jeff Storch

ERISA (the Employee Retirement Income Security Act) is a federal law that applies to most employee benefit plans. It's drafted broadly enough that even individual contracts can be covered by it (which sometimes is a surprise to folks). Executive arrangements can be exempted from many of ERISA's reporting and other requirements by sending a simple "top hat" filing to the Department of Labor. However, ERISA's claims procedures still apply even to "top hat" plans.

ERISA sets forth claims procedures including deadlines and required disclosures when a participant (or the participant's beneficiary or representative) makes a claim for benefits or payment. The procedures are particularly important in case there is a dispute between the participant and the employer on whether the participant is entitled to the payment.

• If a plan or agreement has proper ERISA claims procedures, a claimant must follow those procedures in order to either get paid or ultimately file a lawsuit. If a participant files a suit before completing the procedure process, the court should throw out the suit. If the suit is heard by the court, generally the court must grant some deference to the employer/plan administrator's decision and findings during the course of the claims processing.
• If it does not have proper ERISA claims procedures, the participant can bypass the procedures and simply file suit. In the suit, the court owes no deference to the employer/plan administrator and so can review the claim completely, from the ground up.

The concrete benefits of having compliant claims procedures to the employer are:

1. A second chance to reconsider the initial denial without having the cost of going to court. (Sometimes the initial decision is simply wrong; this gives the employer a chance to correct it.)
2. The chance to develop a record for a court to review in case there is a lawsuit, limiting the scope of the court's investigation.
3. Requiring a higher standard for a court to overturn the employer's decision to deny benefits. There are many cases out there that say, "This court would have decided differently (i.e., against the employer), if the decision were entirely the court's. However, we can only overturn the employer's decision if it abused its discretion, and we do not find an abuse. Consequently, the denial stands."
4. Make a person claiming benefits in an iffy situation have to work harder if they want to get the benefits.

There's no immediate penalty for not having ERISA-compliant claims procedures, but it is sort of like insurance--as long as nothing goes bad, you don't miss it, but if something does go bad, it's better to have it.

As for whether to use arbitration instead of ERISA claims procedures, my understanding is that it was common to use arbitration before the "new" DOL claims procedures came out in 2000. Those rules however pose a problem for arbitration. Now, if an agreement covered by ERISA includes arbitration as its only option to settle claims disputes, the arbitration provision may not be enforceable. While I know of no case addressing the issue, I believe a claimant could argue that an "arbitration only" option is not compliant with the ERISA claims procedures and so could proceed directly to court, skipping arbitration. So, while there is no immediate penalty to the employer for using arbitration in an employment agreement, if there is ever a dispute the employer may find that the arbitration agreement is not enforceable. In that case, a judge will be the one reviewing the evidence and making the decision.

Hopefully, you will never have to use the claims procedures and it will always be clear whenever a person claims payment under the agreements that they are entitled to the payment. If however there is a dispute to eligibility for payment, the procedures will provide you a road map on how to handle the claim and will provide you some protection should the dispute end up in court.