What Employee Benefits Lawyers Do (and How to Make the Best Use of Us)

What do employee benefits lawyers do all day and how can clients make the best use of them? This post offers an overview of the kinds of things employee benefits lawyers work on and areas in which they can be useful to employers and others who encounter benefits-related legal issues.

To set the scene: The newly promoted Director of Total Rewards of a fast-growing company has some employee benefit plan issues to deal with. The company’s annual 401(k) plan audit revealed operational errors and gaps in benefits-related administrative policies and procedures. She also learned from her boss that the Board of Directors will soon be approving a new long-term incentive plan for key employees and will need help from HR in implementing the plan. She has worked closely with a benefits broker on the company’s health plan and other insured benefits, but the broker wasn’t able to advise on these issues. The broker recommends that she contact an employee benefits attorney for assistance. What should she expect? How can she get the most out of the engagement?

General Scope of Practice

Employee benefits and executive compensation (“EBEC”) lawyers help employers and other benefit plan sponsors comply with the complex laws that govern most employee benefit plans, programs, and arrangements. Subject to several exceptions, most employer-sponsored benefit plans are governed by the Internal Revenue Code (the “Code”), the Employee Retirement Income Security Act of 1974 (“ERISA”), or both. The federal agencies that enforce the Code and ERISA namely, the IRS and the Department of Labor issue regulations, notices, and other forms of guidance, all of which supplement the two federal statutes. And the statutes themselves are amended from time to time by Congress, often leading to new or revised regulations and agency guidance. So, there is a lot for benefit plan sponsors and their advisers to keep track of.

EBEC lawyers help clients achieve their organizational goals and get the results they want out of all their benefit plans while complying with applicable law.[*] It is uncommon for an employer to knowingly adopt a plan design that presents an undue risk of negative income tax consequences or intentionally includes features that are prohibited under ERISA (for plans that are subject to ERISA). But mistakes do occur in the design, drafting, or administration of benefit plans. So, EBEC lawyers operate within three interrelated areas of legal compliance: compliance in design, compliance in documentation, and compliance in administration. The plan design must make sense for the employer and comply with law. The plan document must correctly reflect the design and include any terms necessary to demonstrate compliance with any formal requirements (i.e., compliance of the written terms of the plan with applicable law). And the plan must be administered in accordance with the written terms of the plan and applicable law.

The wide variety of benefit plans makes for a challenging practice

Given the surprisingly broad scope of the practice area, many EBEC lawyers choose to specialize in certain types of plans, certain types of employers, benefit plan litigation, or the representation of individuals in pursuing benefit claims. But most EBEC lawyers in private practice routinely handle the following types of plans and issues:

Retirement plans – The documentation and administration of defined contribution plans (like 401(k) plans and 403(b) plans) and defined benefit pension plans require constant attention. In most cases, retirement plans are governed by both the Code and ERISA, and in addition to ongoing compliance with legal requirements, a significant part of EBEC work consists of helping employers fix administrative errors on a voluntary basis, before the errors are discovered by the IRS on audit, under the IRS’s Employee Plans Compliance Resolution System.

Health and welfare plans – The design and administration of health plans (both fully insured and self-insured) have become more complex, with compliance requirements expanding beyond the traditional reach of the Code and ERISA. Federal laws such as HIPAA, the Patient Protection and Affordable Care Act, and the Mental Health Parity and Addiction Equity Act have made this area of EBEC practice particularly challenging in recent years. The rules governing fringe benefit plans – including cafeteria plans (or Section 125 plans) and several types of reimbursement plans that are offered alongside health plans – adds to the complexity of this area.

Executive compensation – Employers of all sizes, across industries (both for-profit and tax-exempt) maintain a wide variety of plans, programs, and agreements designed to incentivize and reward key employees for high job performance, induce key employees to remain with the organization, or simply allow management and highly paid employees to voluntarily defer a portion of their compensation beyond the levels available to all employees through traditional retirement plans. These plans are primarily regulated by federal tax law, and EBEC lawyers help ensure that the plan design will comply with, or qualify for an exception from, the many special tax rules that govern these plans.

Fiduciary governance – Compliance with the fiduciary standards of ERISA, which apply to all ERISA-governed benefit plans, has always been a key aspect of the EBEC practice. But fiduciary governance has become a significant focus area of EBEC work over the past 10 years due to a dramatic uptick in class action lawsuits brought by benefit plan participants to recover losses allegedly caused by breaches of the ERISA standards by plan fiduciaries. EBEC lawyers are the best source of advice and counsel regarding benefit plan fiduciary governance matters.

So, during the course of any given day, a typical EBEC lawyer might work on an amendment to a defined benefit pension plan, advise a client regarding the correction of an operational failure in a 403(b) plan, review an Investment Policy Statement for a 401(k) plan, answer a question regarding the exercise of COBRA health plan continuation rights, and review the design of a new executive incentive plan. (She might also spend some time thinking about how nice it would be to specialize in just a couple of those areas!)

Documents and administration

EBEC lawyers support the business goals and legal compliance efforts of their clients in two broad categories of tasks: documentation and technical advice. In both areas, a good EBEC lawyer will seek to help clients achieve their business goals within the parameters of applicable law, while avoiding potential problems, through careful analysis, clear advice, and careful drafting. In both areas, timely and clear communications between client and attorney are key to achieving the desired results efficiently.

Legal documents, even complex benefit plan documents, are intended to be read, and the best documents are written that way. Benefits plans must be administered in accordance with their written terms, so it is critical that plan documents and related documents capture the intended benefit design in understandable terms. Documents must also contain language that complies with any formal legal requirements. Your EBEC lawyer should make sure both goals are met so that the documents will support the proper administration of the plan.

Questions routinely arise in connection with plan administration, and answering these questions occupies a significant amount of an EBEC lawyer’s time every day. In fact, the most common interaction between an employer and EBEC counsel occurs when the employer discovers an error, potential error, or prospective challenge in plan administration. When such questions arise, an EBEC lawyer will provide answers based primarily on the written terms of the plan document (or other document) and applicable law. If an employer’s administrative practice is found to be at odds with the plan document or applicable law (or both), the lawyer will advise on corrective measures, and forward-looking plan amendments or changes to administrative procedures may be considered to avoid future errors. When legal requirements or agency guidance is unclear, or alternative courses of action are available, EBEC lawyers will use their experience to help the client make a risk assessment that will inform its decision.

Working with consultants and other advisors

Employee benefit plans and executive compensation arrangements come in a variety of shapes and sizes, with differing levels of complexity. For complex plans, most employers need to rely on a panel of advisors who work together to assure that the design, documentation, and operation of the plan all function properly. Four types of benefit plans illustrate the need for multiple advisors: defined benefit pension plans, 401(k) plans, self-funded group health plans, and sophisticated executive compensation plans (especially for tax-exempt employers).

DB Plans – Defined benefit pension plans provide retirement benefits based on complex formulas that take into account the ages, years of service, and compensation of plan participants. And, unlike defined contribution plans (where the benefit is the balance held in the participants’ individual accounts), the funding of a defined benefit plan requires complex computations that must be performed by an actuary. Given the importance of actuarial factors in both the design and funding of a pension plan, the plan actuary is generally considered the lead advisor for pension plans. So, EBEC lawyers work closely with actuaries in preparing plan documents and performing other tasks in support of the establishment and maintenance of the plan.

401(k) Plans – EBEC lawyers collaborate with other plan service providers in a wide variety of areas. EBEC lawyers routinely work with plan recordkeepers to confirm and implement appropriate corrective actions when operational failures or document failures occur. When an employer migrates from one recordkeeper to another, or when recordkeepers go through periodic document updates for legal compliance purposes, EBEC lawyers work with the employer and the recordkeeper to ensure that the intended plan design is maintained. EBEC lawyers also work with the plan’s investment advisor and other investment fiduciaries to make sure that the Investment Policy Statement reflects their intentions and provides meaningful guidance regarding the selection and monitoring of investment fund choices, without creating requirements so strict that they are likely to be breached in operation.

Health Plans – Most employers spend more (much more) money on providing health benefits on an annual basis than they spend on retirement benefits. Health plans contain enormously complex benefit structures and health plan consultants play a key role in calibrating the employer’s health plan design with the employer’s budgetary limitations. EBEC lawyers will work closely with the employer’s health plan consultants to assure that the plan features – including incentives intended to reward healthy behavior – are developed in compliance with applicable laws (including nondiscrimination and parity requirements) and that the plan is operated in compliance with privacy and other laws.

Executive Compensation – The development of incentive and other special compensation plans for executives can offer great opportunities for creativity and calibration to the goals of the employer. Among other things, executive compensation programs are not subject to the kinds of nondiscrimination rules that strictly limit variances in benefits provided under other benefit plans. But these arrangements are subject to strict tax rules, the violation of which can subject both the executive and the employer to severe penalties. A client may have in mind a feature that sounds great but creates a risk of adverse tax consequences, and EBEC lawyers work closely with compensation consultants to make sure that plan features will both achieve the goals of the employer and stay within the confines of federal tax law. In many ways, tax-exempt employers are more constrained in the benefits they can offer to executives than for-profit employers. Of particular importance to tax-exempt employers is compliance with special rules designed to ensure that the compensation paid to executives is “reasonable” in light of market norms. So close coordination between EBEC counsel and compensation consultants is particularly important in the tax-exempt space.

Attorney-Client Privilege

The lines that distinguish EBEC lawyers from other benefit plan service providers can sometimes appear blurry, but there is one form of protection that only EBEC lawyers can provide: attorney-client privilege. In general, when a client seeks advice from an attorney for legitimate purposes (i.e., not in furtherance of criminal activity or the like), the client’s communications and advice provided by the attorney are protected against discovery by adverse parties in litigation and legal proceedings. This protection applies against both governmental enforcement agencies and private plaintiffs. No other professional advisers can offer this protection. Suppose an employer asks its EBEC counsel to evaluate a certain course of action, and counsel advises the employer in writing that the proposed course of action would likely constitute a prohibited transaction under ERISA. If the employer pursues the risky course of action and the DOL or a group of participants later claims that a prohibited transaction occurred, the lawyer’s advice could not be obtained and used to show that the employer’s action was intentional rather than inadvertent. If the same advice were rendered by a consulting firm, the advice would be discoverable – with damaging effect for the employer – in the litigation or enforcement action.

In the employee benefits context, there is one important limitation on the scope of attorney-client privilege. Federal courts have held that legal advice provided to a plan fiduciary is discoverable by plan participants in cases involving potential breaches of fiduciary duty. If the advice referenced above had been requested by and provided to a plan trustee or other fiduciary, the attorney’s written advice would likely have to be disclosed to plan participants in a lawsuit seeking a remedy for losses suffered as a result of the prohibited transaction. For this reason, most EBEC attorneys treat the employer or plan sponsor as the client and advise the client on pitfalls to avoid in order to protect the privilege. (First and foremost: do not forward sensitive written legal advice to other service providers or others outside the employer’s organization!)

Make good use of your EBEC lawyer

Most employers are keenly interested in managing what they spend on legal fees and other professional fees and want to get the most value out of the money they do spend. So here are a few tips on how to get the best value from your EBEC attorneys:

• Involve us early, especially for projects that may raise complex technical issues. This will allow time for analysis and document preparation and review and reduce the likelihood that an issue that could have been discovered and resolved early will derail the project later in the process.

• Involve us often. The better we get to know an employer and its benefit plans, the more efficient and effective we will be in providing the services you need.

• Read your plan documents and other pertinent documents. If you don’t understand something in a document, ask your lawyer to explain it in terms you understand. If necessary, have the lawyer revise the document to make things clearer. (Documents provided by recordkeepers and others are not always susceptible to revision, but all documents can be explained.)

• Don’t rely on non-lawyers for legal advice. Most consultants and brokers explicitly disclaim responsibility for providing legal advice. Take them at their word and use an EBEC attorney for document drafting and legal analysis.

If you have questions about what Verrill’s EBEC attorneys can do for you, please contact any member of the firm’s Employee Benefits & Executive Compensation Group.

[*] There is, of course, a slightly different goal for litigators who specialize in employee benefits cases. They are either representing participants to recover lost benefits or to seek some form of compensation for a breach of fiduciary duties, or they are defending employers who are being sued by the first group.