ERISA – What the Hell Is It?
By: Michael A. McKuin
A Little Background
It’s rumored that President Reagan once said ERISA meant Every Ridiculous Idea Since Adam. That paints an accurate picture. ERISA is actually an acronym for the Employee Retirement Income Security Act of 1974. But the body of law includes a lot more than just the federal statute. It also includes the federal regulations and the “common law” (decisional law of the federal courts). The law was primarily intended by Congress to address irregularities in pension plan administration. Legal historians credit the 1963 closing of the Studebaker plant in South Bend, Indiana as the genesis of ERISA. Because that pension fund was so poorly administered, the plant closing resulted in a loss of pension benefits for many of Studebaker’s employees.  The mismanagement of the Teamsters Central States Pension Fund also played a part in the history of ERISA's early enforcement, because of its rather colorful history of making questionable loans to certain mob run casinos in Las Vegas. 
There’s an old joke about a sure-fire way to empty out a room of lawyers. Just mention ERISA and they’ll scatter to the wind. It is considered by most lawyers to be one of the most boring areas of law, perhaps coming in a close second behind tax law. Judges (who are really just lawyers in black robes) tend to view it the same way. So much so that from the moment any ERISA case lands on their dockets, they’ll do practically anything to get rid of it. ERISA is indeed a mind numbingly complex area of law. And because of that, it has been contorted, distorted, abused and exploited by a whole host of characters, some with outright nefarious intent.
But there’s something very special about mind-numbing complexity. No one can truly understand it. I learned this as a second year law student back in 1979. During registration I decided to enroll in a Tax Law class. God only knows why. It wasn’t a mandatory course and I had no great interest in the subject. I guess I thought it might be a good idea to know something about it. The professor required that we purchase not only the Tax Code, which spanned several volumes, but the entire federal tax regulations, which as I recall, consisted of about a dozen or more volumes. He didn’t do it because the class was obliged to actually read any of it. In fact, I don’t think any of us ever looked at any of those books throughout the entire duration of the semester. He was making profound point.
Fortunately, the regulations were in paperback so it wasn’t too big a bite out of my finances. It took me three or four trips up two flights of stairs to schlep the entire mass of paper from my car up to my third-floor apartment. As I stacked the books higher and higher on my living room floor it hit me. I knew I was going to do well in the course and as it turned out, I received one of the top grades in the class. How did I know this? Because as I looked at that enormous pile of useless information I realized that no one could ever begin to understand anything that massive (and I’m sure that the Code and the regulations have expanded considerably since that time). I went back to the bookstore to buy the Gilbert outline on tax law. For those non-lawyers out there, Gilbert outlines summarize various areas of law and are a vital study aid for law students, especially in preparing for final exams. They vary in size, depending on the field of law. For example the outlines for Torts and Constitutional law are huge. By comparison, the outline for Tax Law was the thinnest I’d ever seen. My suspicion was confirmed. The more complicated something is, the more room you have to play with it.
Regardless of its complexity, when it comes to ERISA claims, they all have two things in common: (1) The facts of each case are unique; and (2) the law is always the same (until it changes). However, the same issues keep surfacing again and again. It seems insurance companies can only come up with so many ways to screw over claimants. After a while, the same patterns and practices are seen time and time again.
Is My Plan Governed by ERISA?
If you have a long term disability (income replacement) policy or other insurance coverage that you purchased on your own, independent of your employer, then ERISA has no application to it. Your policy and your rights to recover benefits are governed entirely by the laws of the state (usually the state you live in). But if your plan was purchased by or through your employer then it may be subject to ERISA.
In determining whether an employer-sponsored plan is governed by ERISA, courts have generally followed the approach of the Eleventh Circuit in a case known as Donovan v. Dillingham.  Under the Dillingham test, an ERISA plan exists if a reasonable person can ascertain: (1) the intended benefits, (2) intended beneficiaries, (3) the source of financing, and (4) the procedures for receiving benefits. The purported plan need not be formal or written to qualify as an ERISA benefit plan, but rather, the court must look to the “surrounding circumstances” to see if the four factors have been met. 
As a practical matter, it doesn’t take much to satisfy the test and Courts will generally find the existence of an ERISA plan even where no such plan is intended or wanted by anyone (except the insurance company), unless stringent requirements are met and the plan falls under the “safe harbor” regulation.  Under that regulation, an employee welfare benefit plan does not include a group insurance program in which: (1) the employer does not make contributions; (2) participation by employees is voluntary; (3) the sole functions of the employer are, without endorsing the program, to permit the insurer to publicize the program and to collect premiums by payroll deduction and forward them to the insurer; and (4) the employer receives no remuneration other than reasonable compensation for administrative services actually rendered in connection with the payroll deduction. In addition to those rare plans falling within the “safe harbor” regulation, there are certain other plans, such as government and “church” plans that are exempt from ERISA. So if you’re employed in the private sector and you have, health, life, disability or any other insurance coverage provided by or through your employer, the odds are your benefit plan is governed by ERISA. And if you have a claim for benefits under that plan it will likely be governed by ERISA. So what’s the problem with that? There are many. Keep reading.
The Outstanding Cast of Characters
There are two varieties of ERISA benefit plans, insured and self-funded. In an insured plan, the employer purchases a group insurance policy from an insurance company to cover its employees for such things as health, short-term disability, long term disability, life, dental insurance, etc. In a self-funded plan, the employer provides the funds, assumes the risk and pays benefits to its employees out of its general assets; however, usually the employer hires an independent claims administrator to handle the day-to-day tasks of adjusting and paying claims. Although self-funded plans used to be very common, they are becoming increasingly rare today.
To know the players in this game you’ve got to have a scorecard and a little knowledge of "ERISA-speak", which is a foreign language in and of itself. So I first need to explain who the various parties are that you’ll encounter along the way and what they do. First are the insurance companies. We all know who and what they are so no further explanation is required. Second is the “plan sponsor”. That one’s easy. It’s the employer, who “sponsors” the “plan” for its employees. Third is the “plan administrator”. That is almost always the employer. The reason for the two different terms is that ERISA imposes certain obligations on plan administrators, which usually includes reporting and disclosures requirements, providing certain information to employees, etc. Fourth is the “claims administrator”, aka, “claims fiduciary”. That is a person or entity under contract with the “plan administrator”. In an insured plan it’s usually the insurance company but might be our next villain. Fifth is the “third party administrator” (TPA). A TPA is a claims administrator either hired by an insurance company or by the plan administrator, if the Plan is self-funded to “administer” (process and pay) claims. Sixth is the “plan participant”. That’s the employee. Seventh the “beneficiary”. That would also be the employee but can also include the employee’s spouse or children, if that employee has dependent coverage under the plan. In most cases, except the relatively rare self-funded plans, the terms “insurer” and “administrator” are almost interchangeable. So in order to avoid the confusion and tedium that would result from having to make simultaneous reference to both entities in most instances, if I use the term “insurer” you can assume that it applies equally to both insurance companies and administrators. I’ll confine the bulk of my remarks to insurance companies, since they are the most notorious of all the culprits.
The "Employee Welfare Benefit Plan"
It’s often said that ERISA was enacted by Congress to eliminate the chaos of having 50 different state regulatory schemes impacting employer-sponsored insurance plans. That’s total bullshit. For many years the insurance industry fought any attempt at federally regulating their activities. If there ever was any chaos of state regulation of insurance, it was a chaos the insurance industry loved. But today, the biggest beneficiary of ERISA is that same insurance industry. That change didn’t happen overnight.
Oddly, when it was enacted in 1974 the focus of Congress was on pension reform, not revolutionizing such things as group medical, life or disability insurance. However, today -- primarily as the result of federal judicial decisions over the past four decades -- ERISA now governs almost all employee benefits in the private sector, including employer-sponsored health, life and long term disability insurance plans.
The reasons for this gargantuan growth in the power and scope of ERISA were right there in the text of the statute, although few seemed to notice it at the time. And there’s a reason for that. The ERISA statute itself is a 461 page behemoth. Buried within its confines are a few obscure but key provisions. This is where it gets a little deep in the weeds, but first there is the ERISA pre-emption clause, which states that: “[T]he provisions of . . . this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan . . .”  OK, so what’s an “employee benefit plan”? The statute provides that, “(t)he term ‘employee benefit plan’ or ‘plan’ means an employee welfare benefit plan or an employee pension benefit plan or a plan which is both an employee welfare benefit plan and an employee pension benefit plan."  Then, the statute goes even further stating, “(t)he terms ‘employee welfare benefit plan’ and ‘welfare plan’ mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section 186(c) of this title (other than pensions on retirement or death, and insurance to provide such pensions).” 
If all that sounds a bit complicated, it is. It’s not clear whether anybody back in 1974 had any clear idea as to what the language meant, let alone what it would come to mean in the succeeding decades. Presumably, the term “employee welfare benefit plan” was intended to relate to some kind of self-funded plan set up by employers or unions as a part of the collective bargaining process. The intent, some thought, was apparently to allow certain larger employers or unions to “self-insure” their own benefit plans. But that’s not what the text of the statute says. The language is not limited to only self-funded plans. It references insured plans as well. The language states on its face that it refers to any plan. Because of ERISA’s broad preemption clause, discussed below, and as the result of federal judicial decisions over the next four decades, this seemingly insignificant part of the law has resulted in practically all employer-sponsored medical, life and long term disability and other insurance plans being characterized as “employee welfare benefit plans” under ERISA.
A Potpourri of Protected Rights
On its face, ERISA is a truly magnificent law. One of its architects, Sen. Jacob Javits, described it as “the greatest development in the life of the American worker since Social Security”. The language of the ERISA statute is replete with promises of protection for plan participants and beneficiaries. Reporting and disclosure requirements are imposed upon Plan Administrators -- and most noble of all -- ERISA imposes “fiduciary duties” on anyone, who makes final decisions about paying benefits.
Pick up any plan booklet, describing health or disability benefits, and you’ll find a wonderfully profound and inspiring “Statement of Rights under ERISA”. There in black and white is an explanation of the rights guaranteed by the federal law. A careful reading of it might conjure up images in your mind of the Bill of Rights to our Constitution. But let me assure you, if those two documents were in any way similar, we would all be living in gulags. The more you understand about ERISA the more you will realize things aren’t quite what they seem.
The Pre-emption Clause
Most of us tend to believe that the very purpose of our civil and criminal laws is to effect justice – for every wrong there is a remedy. Right? Wrong. ERISA can have a very direct and profound effect upon your rights to receive the very benefits you are promised under your own plan. Perhaps just as importantly, the law can shield what would otherwise be tortious violations (civil wrongs) from liability. As far as I’m concerned, ERISA was the preeminent scam of the 20th century. While it proclaims to give employees greater rights and protections, the law has had the effect of stripping employees of many of their rights, particularly as against insurance companies. Although there are protections written into the law, they are obscure, minimal and often ambiguous.
For example, every state has various consumer-oriented state laws that apply to contracts in general. Many of those state laws were derived from common-law principals, such as breach of contract and breach of the implied covenant of good faith and fair dealing (i.e. “bad faith”). In the old days, before ERISA was enacted, insurance companies had an obligation under those state laws to treat policyholders fairly. If they didn’t, they could be held liable in state court for punitive damages, which might far exceed the amount of the actual claim itself. For that reason alone, insurance companies were very conscientious in processing and paying legitimate claims. Although relatively few “bad faith” verdicts were ever rendered, those that were awarded were often whoppers. So the mere threat of punitive damage exposure had a wonderfully self-policing effect on the entire insurance industry. In fact, such laws were really the only truly effective thing that kept insurance companies in line. Today, such state consumer laws are pre-empted by the federal ERISA statute (meaning federal law pushes state law out of the way). No matter how egregious an insurance company’s conduct, ERISA provides it with a virtual license to steal. This absolutely removes any incentive an insurance company might otherwise have to treat the claimant fairly.
Not only does ERISA pre-empt most state “bad faith” lawsuits, but there are no corresponding punitive damages available under ERISA, no matter how oppressive an insurance company’s tactics and no matter how frivolous its claim denial. There is no right to a jury trial under ERISA. The most an aggrieved claimant can usually recover in a lawsuit is the amount of benefits due, interest, costs and a discretionary award of attorney fees. (Discretionary meaning the judge may award all of them, some of them or none of them). So, even if the claimant’s case proceeds all the way to judgment, the most that the insurer can lose is the amount that it would have paid had it handled the claim properly in the first place plus perhaps some attorney fees. Since many claimants are unwilling or unable to “go the distance” in fighting their insurance plans, some unscrupulous insurance companies are assured of winning the war under ERISA, even if they lose a battle here and there. This absolutely removes any incentive that an insurance company might otherwise have to treat claimants fairly. Thanks to ERISA, insurance companies enjoy immunity for unfair and deceptive practices. Facing no sanctions for bad conduct, they can deny meritorious claims. Even in those cases where they do pay out benefits, insurers can often wear financially vulnerable claimants down to a point where they’ll settle their claims for much less than the insurers owe. Thus, by structuring employer-sponsored insurance plans as “employee welfare benefit plans”, the insurance industry has, in a very ingenious way, carved out the single greatest immunity from civil liability ever devised. Several factors coalesce to make ERISA the scam that it is.
The Standard of Review
In an ERISA case a court may apply one of two possible standards of review, either a de novo standard or a deferential standard, also known as the “abuse of discretion” standard. This is an area, where it gets even more complicated and for that reason, I have devoted a separate article to it. [The Standard of Judicial Review - Playing Against a Stacked Deck]
Discretion, Perversion of “Fiduciary Duty” and the Paradox that is ERISA
ERISA imposes fiduciary responsibilities on anyone, who exercises final decision-making authority over plan benefits. That includes the “plan administrator” (usually the employer) and the insurer processing a claim for benefits. That sounds good, on the surface if you understand what that means. Fiduciary duty is the highest responsibility imposed by our civil law. It is a trust law concept that requires the fiduciary place the interests of the beneficiaries above his own. Under this fundamental legal principle, there is absolutely no room for any kind of self-interest of the fiduciary that would conflict with those of the beneficiary. The beneficiary’s interests are said to be paramount. ERISA took this revered concept and turned it into an abomination. In the field of ERISA law, “fiduciary duty” means very little because the way the courts have construed the law, nothing prohibits fiduciaries, from operating under such a conflict of interest In fact, such conflicts are expected and to some extent even condoned. This is the ultimate paradox of ERISA.
It all starts with the collision of contract law (which has historically governed insurance contracts) with trust law (imposed by ERISA) and the discretionary powers that can be vested in a fiduciary of an actual “Trust”. I’ll get into that in more detail in another article, How ERISA has Redefined the Very Nature of Insurance, but for now, suffice it to say that if a plan is insured and if the insuring company has been delegated the discretion to make final decisions regarding the payment of claims, then the insurer is a deemed “fiduciary” under ERISA. The conflict of interest in a situation such as that is obvious, since the insurance company is deciding whether or not to pay benefits from its own assets.
In the past, insurance companies have pre-arranged for such delegations of discretion by inserting language into their policies, giving them that discretion. Obviously, entrusting any insurance company with “fiduciary” responsibility is like putting the fox in charge of the proverbial hen house. Or to mix metaphors, it would be like hiring Willie Sutton as your financial advisor. No corporate charter exists, which states that an insurance company is established for the purpose of protecting plan participants. Insurance companies, just like any other corporations, are formed for the sole purpose of making profits for their shareholders. This problem has been addressed recently by an increasing number of states that have adopted statutes banning such discretionary language in insurance policies to varying degrees. Today at least 25 states, including California, have enacted statutes, banning discretionary clauses in insurance policies. Such state law bans are permitted because, unlike common law torts such as “bad faith”, which apply to all contracts generally, the discretionary bans merely “regulate insurance”.  So at least as far as insured plans are concerned, the deferential standard has been rendered a relic in those states. The bans do not affect self-funded plans. The California statute does not apply to health insurance policies, but does broadly ban discretionary clauses in life and disability policies (as well as contracts, certificates, or other agreements), which grant insurance companies discretion to determine eligibility for benefits or to interpret plans. 
Exhaustion of Administrative Remedies
If a claim is initially denied, ERISA requires that there be “a full and fair review by the appropriate named fiduciary of the decision denying the claim.”  Therefore, all ERISA plans will have some kind of internal appeal process by which claim denials are reviewed further at the request of the claimant. Sounds good, right? It isn’t. It’s a trap for the unwary, unless you're represented by competent, experienced legal counsel. The problem here is that unsuspecting claimants run head-on into a contrivance they likely no nothing about, the "administrative record". I will cover that subject in the separate article, The Importance of the "Administrative Record" in ERISA Benefit Cases (If You Don't Know the Process, You'll Forfeit Valuable Rights).
How Did We End Up in a Place Like This?
ERISA was originally enacted by Congress to address issues relating to pension fund administration and (aside from the fact that there are relatively few defined pension benefit plans left today in the private sector) it has done that quite well. But over the ensuing 40-plus years and primarily as the result of federal judicial decisions, ERISA got completely off track and veered into the areas of health, life and disability benefit claims. The impact that it has had in those areas has been devastating for consumers. Big government schemes tend to do that.
Getting back to the question - how could this ERISA debacle have happened? How could a seemingly innocuous federal statute, designed to give employees greater rights, end up doing just the opposite? How could a well-intended act of Congress have turned into a national consumer insurance nightmare? Did powerful forces in the insurance industry conspire with or bribe Congress to enact this fraud? The answer is “No”. There was no sinister conspiracy. (No one that I know of in the insurance industry would be bright enough to hatch a scheme like this). As far as I can tell, Congress’s motives in enacting ERISA were as pure as the driven snow. ERISA just evolved into the scam that it became, which may lead one to ponder the question: “What if Congress really wanted to screw us?” As President Reagan also once said, “The nine most terrifying words in the English language are, ‘I'm from the government and I'm here to help.’”
Many doctors, lawyers, judges, consumer groups and politicians have denounced this travesty, but no one has effectively done much about it. There have been incremental positive developments in the case law of some federal circuits, including mine. But sometimes they’re cut back or watered down by subsequent cases. The federal regulations have also undergone significant revision. But in my personal opinion, the only way to restore complete fairness to the system would be to drastically curtail ERISA’s pre-emption of state law remedies, by reestablishing the right of an individual to sue his benefit plan in state court for damages for breach of contract and for “bad faith”. I don't expect that to happen anytime soon, if ever. The insurance lobby in Washington, D.C. exerts considerable influence to keep things the way they are; and there is no equally powerful or effective consumer lobby. ERISA reform is not exactly a “hot button” issue for most Americans. ERISA claimants are like voices crying in the wilderness. They form no powerful political force. In fact, most of us don’t even think about medical or disability benefits, until the time comes when we need them.
Historical developments, augmented by court decisions over four decades have brought us to where we are today. ERISA, as we know it today, is a fraud carried out almost entirely by the insurance industry. But, it’s a fraud sanctioned by the federal judiciary and allowed by Congress to continue, with little likelihood of it going away anytime soon.
 “The Most Glorious Story of Failure in the Business”: the Studebaker-Packard Corporation and the Origins of ERISA. Buffalo Law Review, Vol. 49, P. 683, 2001. 13 Nov 2001 James A. Wooten, University at Buffalo Law School.
 See, e.g., "Teamster’s Central States Pension Fund Reform and ERISA Enforcement Remedies”, Hearing Before The Subcommittee On Oversight Of The Committee On Ways And Means House Of Representatives Ninety-Seventh Congress Second Session. July 26, 1982U.S. Government Printing Office’ Washington 1982, page 217; And see, “Oversight of Labor Department Investigation of Teamsters Central States Pension Fund”, Hearings Before the Permanent Subcommittee on Investigations of the Committee on Governmental Affairs, United States Senate, Ninety-Sixth Congress Second Session, August 25 and 26 And September 29 and 30, 1980, U.S. Government Printing Office’ Washington 1982, pages 188, 287-288.
 Donovan v. Dillingham, 688 F.2d 1367, 1373. (11th Cir. 1982) (en banc).
 Id. at 1372-73.
 29 CFR. § 2510.3- 1 (j).
 29 U.S.C. § 1144(a).
 29 USC 1002(3).
 29 USC 1002(1).
 Standard Insurance Company v. Morrison, 584 F.3d 837, 842 (2009). See also: Polnicky v. Liberty Life Assurance Co. of Boston, 999 F.Supp.2d 1144, 1148 (N.D. CA, 2013), (applying de novo standard of review to ERISA claim for denial of benefits because “[t]he Policy was continued in force after its January 1, 2012 anniversary date, [so] any provision in the Policy attempting to confer discretionary authority to Liberty Life was rendered void and unenforceable”).
 California Insurance Code §10110.6.
 29 USC Section 1133(2).
ERISA Disability Lawyer