Editor’s Note: This blog first appeared last Thursday on our sister blog – Employee Benefits Law Report.
My assistant informed me that my patience is shot and I need to do something about that, so I am channeling my energy into one issue. Since health care reform was enacted, I have been hearing about how we should anticipate a flood of ERISA Section 510 (29 U.S.C. Section 1140) discrimination cases from people who are not participants under the plan terms, but want to be participants. I don’t get it.
ERISA Section 510 provides, “[i]t shall be unlawful for any person to…discriminate against a participant or beneficiary…for the purpose of interfering with the attainment of any right to which such participant may become entitled under the provisions of an employee benefit plan.” ERISA Section 3(7) defines “participant” as “any employee or former employee of an employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan.”
In Firestone Tire & Rubber Co. v. Bruch, the United States Supreme Court first considered Section 3(7) (29 U.S.C. Section 1002(7)) in the context of standing. It found this term to include “employees in, or reasonably expected to be in, currently covered employment,” or former employees who “have . . . a reasonable expectation of returning to covered employment” or who have “a colorable claim” to vested benefits. The Court held that in order to establish that he or she may become eligible for benefits under ERISA Section 502, a claimant must have a colorable claim that (1) he or she will prevail in a suit for benefits, or that (2) eligibility requirements will be fulfilled in the future. The Court applied the same standard to Section 104(b)(4), the provision that requires providing plan documents that indicate whether or not an individual is eligible to participate to a person who claims to be eligible.
As Justice Scalia explained in an opinion concurring in part and concurring in the judgment, this definition ignores the fact that some of these supposed participants and beneficiaries are not actually participants and beneficiaries. Consider competing claimants to a 401(k) plan death benefit: a same-sex spouse not designated as a beneficiary, and a parent designated as beneficiary. One of these will ultimately be found to be a beneficiary, and the other will not. But both will be treated as beneficiaries for purposes of making their case.
In Fleming v. Ayers & Assoc., the Sixth Circuit held that where an employer hired a part-time employee with the [employer’s] intent that she would become full-time when a position opened up, the employee was a participant under ERISA Section 3(7) and for purposes of Section 510. The Court did not further explain this conclusion, or discuss Firestone or Justice Scalia’s caution. A number of courts have distinguished Fleming, explaining that ERISA Section 510 does not require employers to make a part-time employee who is ineligible for benefits a full-time employee and thereby eligible for benefits. See, e.g., Geist v. Gill/Kardash P’ship, LLC, 671 F. Supp. 2d 729 (D. MD 2009) (plaintiff was not a full-time employee and was not eligible for benefits under the plan terms; plaintiff rejected a forty hour per week full-time schedule on more than one occasion and seems to have understood that this decision disqualified her for benefits); Pine v. Crow, 2001 U.S. Dist. LEXIS 8629 (S.D. IN 2001) (ERISA does not require an employer to make an employee full-time); Shawley v. Bethlehem Steel Corp., 784 F. Supp. 1200, 1203 (W.D. Pa. 1992) (concluding ERISA does not expressly prohibit a refusal to hire based on the employer’s potential benefit liability), aff’d, 989 F.2d 652 (3rd Cir. 1993).
Now let’s consider the ERISA claims in Sanders v. Amerimed, Inc., a recent decision in the Southern District of Ohio. Sanders was a part-time employee and not a participant in the health care plan, because the plan’s eligibility provisions provided that only full-time employees were eligible to become participants. Sanders wanted to be a full-time employee, and he wanted to be a participant, and quit. He then argued that the defendant violated ERISA Section 510 by not hiring him into a full-time position. The Court held that under Firestone and Fleming, Sanders had a colorable claim to benefits and standing to pursue his claims. The Fleming decision seems to be overreaching; it does not explain the significance of “intent” in the context of case law. But even if we assume the conclusion was valid, it does not appear to provide authority for treating Sanders as anything other than a participant want-to-be. Sanders was well aware he was not a plan participant: that is why he quit. So I do not understand how he even had a colorable claim to benefits, but for the sake of argument, let us move on to the Section 510 claim itself.
The definition of “participant” in Section 3(7) is just the beginning; ERISA goes on to develop this concept in Section 202 (29 U.S.C. Section 1052) and other provisions. The steps require asking whether under the plan terms, as limited by law:
- Is the employee a member of a classification that is eligible to participate?
- Has the employee satisfied any age requirement?
- Has the employee satisfied any service requirement?
- Has the employee reached an entry date?
An employee does not become a participant and have a reasonable expectation to benefits under plan terms until all four steps are completed. Calling an employee a participant before his entry date put the cart in front of the horse. ERISA, hundreds of pages of regulations, the Form 5500 instructions and the DOL website are replete with explanations and examples regarding when an employee becomes a participant. These steps are important for many reasons. Most specifically, many employers treat the first 90 days of employment as a “trial period,” and have high turnover, especially during this period. Health care reform and hundreds of pages of regulations respected (but limited) this waiting period. Further, the United States Supreme Court reminded us again in CIGNA Corp. v. Amara that we have to apply the terms in the plan document, and that reasonable expectations about benefits can only be based on the plan documents. An employee who has not satisfied the eligibility criteria to become a participant is not going to become eligible for a benefit until he first becomes a participant. Can an employee request documents and does he have standing to bring this case? Maybe, but that does not mean he is actually a participant. Do the plan terms give an employee the reasonable expectation that he will be hired as a full-time employee and become eligible to participate in the plan and receive benefits from the plan? No.
We are all painfully aware that health care reform’s 30-hour “full-time employee” definition has resulted in hardship for some employees. But outside of a collective bargaining scenario, no law that I am aware of requires an employer to put (or keep) an employee into a benefits-eligible employment classification just because the employee wants this. Sanders v. Amerimed, Inc. suggests that immediately upon hiring, every employee becomes a participant in every plan sponsored by the employer, regardless of plan terms. That simply cannot be reconciled with ERISA Section 202, and given the additional costs this would impose on plans, I would call this actuarial heresy similar to that of Conkright v. Frommert. It would also give significant pause to employers hiring employees, and potentially pose even greater hardship for individuals who are not currently employed in benefits-eligible positions. We hope that CIGNA Corp. v. Amara, Conkright v. Frommert, Justice Scalia’s caution in Firestone Tire & Rubber Co. v. Bruch will lead courts to the conclusion that the definition of the term “participant” for purposes of ERISA Section 510 must be consistent with the plan terms. In the meantime, we continue to encourage employers to be cautious about their employment decisions and health care compliance decisions, and communications regarding these decisions. Namaste.