The Cohen Milstein Benefits Blog

June 22, 2022

Employee Stock Ownership Plans – Understanding the Risks and Rewards

Michelle C. Yau and Daniel R. Sutter

Employee Stock Ownership Plans (ESOPs) are retirement plans that are set up to invest solely in the stock of the employer.

Among other things, ESOPs offer the company and employee participants various tax benefits, making them “qualified” plans that are regulated by the Employee Retirement Income Security Act (ERISA). If managed properly, and in accordance with ERISA, ESOPs can be help employees save for retirement.

Traditionally used by smaller, privately held companies, ESOPs can be used by larger, publicly held companies and can complement 401(k) retirement plans. Similar to the 401(k)-vesting period, an ESOP participant earns an increased portion of company shares in the plan for every year of service. When an employee retires or resigns, they can “cash out” of the ESOP and claim their nest egg.

Is Your Retirement Plan Imposing a Marriage Penalty? What You Need to Know / June 22, 2022

Michelle C. Yau

If you are a married person who participates in a pension plan, you should be on alert that your plan might violate the federal law ERISA’s actuarial equivalence, anti-forfeiture, and joint and survivor annuity requirements. You’ve worked for the same length of time at the same company as your unmarried co-worker. You’re both ready to retire, yet it’s possible that your single co-worker might take home more pension benefits than you and your spouse. While ERISA requires that both your pensions be overall worth the same, a growing number of lawsuits allege that companies are failing to ensure that pensions are actuarially equivalent—and specifically that the companies’ failures are systematically underpaying married couples. This means that you and your surviving spouse could be the subject of a “marriage penalty” resulting in a substantial loss of benefits.

There are a number of lawsuits currently challenging this conduct. In one case, pension plan participants allege that their plan used outdated mortality tables to determine the value of joint and survivor annuities, resulting in married retirees not receiving their full ERISA-protected pension benefits.

Here’s what you need to know.

Equivalence Suits Target ERISA Fiduciaries
February 10, 2020

Michelle C. Yau

It is important for Taft-Hartley plan trustees to be informed of developments related to ERISA fiduciary liability. Cohen Milstein continuously monitors ERISA lawsuits, and in this issue of the Shareholder Advocate, we summarize developments related to several lawsuits concerning actuarial equivalence rules found in certain ERISA provisions. Over the last year, there were nine class cases filed that allege pension plans are violating ERISA by paying less than actuarially equivalent benefits to defined benefit plan participants. Plaintiffs in these lawsuits generally allege that plan fiduciaries and sponsors of their defined benefit plans violate ERISA when a plan uses outdated mortality tables to calculate alternative forms of benefits or “form factors,” which are predetermined factors used to convert normal form benefits into alternative forms. The plans at issue in these lawsuits are those sponsored by household names, such as American Airlines, U.S. Bancorp, AT&T, Metropolitan Life Insurance Company, Anheuser-Busch, Raytheon Company, and Huntington Ingalls Industries.

ERISA and Health Plans: The Latest Cigna Case Illustrates the Changing Landscape of ERISA Litigation
February 3, 2020

In a 150-page complaint filed on December 31, 2019, styled Advanced Gynecology and Laparoscopy of North al. v. Cigna Health and Life Insurance, Cigna is accused of violations of  the Employee Retirement Income Security Act of 1974 (ERISA), of acting in violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), and of committing a variety of state law violations. The Complaint accuses Cigna of engaging in several “brazen embezzlement and conversion schemes, through which it maximizes profits by defrauding patients, healthcare providers, and health plans of insurance out of tens of millions of dollars every year.”

Watch These ERISA Cases in 2019
January 1, 2019

Daniel R. Sutter

A number of vexing issues facing ERISA practitioners came to a head in 2018 and are primed to be resolved in the coming year. This article will examine the cases raising these issues, and the impact their resolution in the coming year will have on retirees and the retirement industry.

Is Congress Protecting Its Constituents or Running Interference for Bad Actors?
November 14, 2018

A group of twenty-seven legislators has authored a letter asking President Trump and the Department of Labor (“DOL”) to provide the ESOP industry with guidance on substantive issues, most importantly the issue of valuation, and to stop engaging in what it termed “regulation through litigation”. The letter asks the DOL to collaborate with the ESOP community and basically requests the President and the DOL to stop engaging in enforcement activities until such meaningful guidance is provided.

Is My ESOP Account at Risk?
August 30, 2018

An Employee Stock Ownership Plan (“ESOP”) is an ownership program where a company provides its employees with company stock, usually at no cost to the employees.  Shareholders often create an ESOP by selling their shares of stock to the newly created ESOP as a form of an “exit strategy.”  The ESOP may pay the shareholders for these shares of stock by taking out a loan (“leveraged ESOP”).  As the company creates revenue, it repays the ESOP’s loan, and the ESOP releases shares of company stock to its employees.

Employee Stock Ownership Plans: Vulnerable to Abuse?
May 30, 2018

Many traditional 401(K) plans are being replaced with employee stock ownership plans (“ESOPs”). While in many cases an ESOP is a valuable benefit to employees, they are also vulnerable to abuse.

What is an ESOP?

An ESOP is a qualified defined-contribution employee benefit plan designed to invest primarily in the stock of the sponsoring employer. That means, instead of investing the retirement contributions into traditional investment vehicles like stocks, bonds or money market funds, the retirement contributions are invested back into company stock. ESOPs are “qualified” in the sense that the ESOP’s sponsoring company, the selling shareholder and participants receive various tax benefits. For these reasons, ESOPs are often used to give the employees a vested interest in the company’s success and aligning their interests with the company’s shareholders. Unfortunately, ESOPs can be used for improper purposes, which harms employees and violates the Employee Retirement Income Security Act (“ERISA”), a federal statute that protects employee retirement assets from abuse.

A Rule in Flux: The Department of Labor’s Fiduciary Rule
December 1, 2017

Daniel Sutter

As litigation about the legality of the Department of Labor’s controversial Fiduciary Rule reaches federal circuit courts, the current administration has turned into the Fiduciary Rule’s biggest adversary.

Over a year ago, insurance companies started a broad offensive against the Fiduciary Rule in federal courts across the country. Challengers to the rule have filed six cases in three federal district courts to date. Despite the success of the Department of Labor (“DOL”) in defending the Fiduciary Rule, recent changes of position by the Department of Justice and DOL have cast a shadow over the Fiduciary Rule’s future.