In the United States, employees have the privilege to invest in their companies and align their interests with those of their shareholders through the Employee Stock Ownership Plan (ESOP). At the same time, workers' retirement assets are protected by the Employee Retirement Income Security Act (ERISA) of 1974. This Act ensures that workers' retirement plan fiduciaries do not misuse their assets.

Despite ESOP and ERISA's existence, there have been several violations that have affected their respective contributors. These violations have prompted class-action lawsuits against the responsible parties. Filing a class action lawsuit is complicated, hence the need to involve a professional attorney specialized in these types of cases. Contact us at Consumer Alert Now and let us help you as you file a lawsuit against the organization that violates your Employee Stock Ownership Plan or Employee Income Security Act.

What you Need to Know About Employee Retirement Income Security (ERISA)

The Employee Retirement Income Security Act (ERISA) of 1974 was enacted to ensure that workers' plans are not misused by organizations responsible for planning, regulating, and furnishing these funds. Under this Act, responsible organizations must provide the retirement plan's participants with necessary information about the program.

ERISA also set minimum standards for participation, benefit accrual, vesting, and funding to the plan. Specifically, the Act defines how long a person should work before becoming eligible to participate in a program, accumulate benefits, and attain a nonforfeiture right to those benefits. It also establishes detailed funding rules that expect the plan sponsors to provide enough funding for the scheme. 

Under this Act, fiduciaries are people with authority or control over a plan's management or asset, including anyone providing investment advice to the program. Fiduciaries who ignore their conduct's principles can be held responsible for restoring losses made through the plan.

Since this Act pertains to private businesses that offer retirement plans, welfare benefits, and pension plans to their employees, the following private-sector areas fall under this category:

  • S-corporation
  • LLC
  • Partnership
  • Sole proprietorship
  • C-corporation
  • Nonprofit organizations
  • Small businesses with couples as the employees

Although ERISA applies to the above stated private-sector areas, specific areas are not under this plan. This includes:

  • Churches and religious institutions
  • Unfunded excess benefit plans
  • Government employers and entities
  • Plans serviced outside the United States for the beneficiary of non-resident aliens.
  • Benefit plans maintain only to complying with worker's compensation
  • unemployment regulations, or disability.

Please note, even though ERISA covers a vast range of employees, specific benefits are covered under this plan. This includes:

  • Flexible spending accounts
  • Disability insurance plans
  • Health reimbursement plans
  • Medical, prescription, vision, and dental insurance plans
  • Defined-benefit and defined contribution funds
  • Long-term care insurance plans
  • Scholarship benefits
  • Welfare benefits like 419(a) and 419(a)(f)(6) plans
  • Severance plans

How ERISA Protects Employees

The main purpose of ERISA is to put in place the best interests of employees. It does so in the following ways:

  • Ensure that employees access information regarding their pension plans. Under this Act, employers providing retirement plans must let their workers know about any significant program changes. Employers should also let their workers know how to file claims for their benefits.
  • Companies should give information about changes related to any programs to workers in writing upon request or through the administrator of the plan.
  • ERISA should protect employees from wrong actions committed by a plan fiduciary or anyone with control over assets contained in a plan
  • Fiduciaries should not take too much risk while managing funds contained in the employees' retirement plans.
  • Fiduciaries can be held liable for improper planning and massive losses for the employee.

Types of Plans Under ERISA

ERISA can cover both defined-contribution plans and defined-benefits. Defined contribution plans are tax-deferred retirement plans, while defined-benefits are employer-sponsored retirement plans that rely on computed formulas to determine how much the employer will contribute to the program. Therefore, ERISA includes plans like 401(k), profit-sharing plans, and deferred compensation.

There are also some non-retirement accounts like employee health and welfare benefits plans covered under this Act. Some common examples include health reimbursement accounts, health maintenance organizations, flexible spending accounts, disability insurance, life insurance, and other welfare benefit plans. 

For a plan to qualify under ERISA, its plan sponsor must meet several federal requirements regarding its vesting, participation, funding, and accrual benefit. Plan sponsors or employers must also provide a detailed report to the government and provide documents that detail how the plans work and the benefits that it will achieve.

The Employee Benefits Security Administration, a unit in the Department of Labor (DOL), administers and oversees ERISA.

Importance of ERISA

ERISA has a significant benefit to its target beneficiaries. This Act protects mismanagement and abuse of retirement savings and ensures that those in charge of these savings act in the participants' best interest. It also guarantees transparency and accountability by providing that participants access information related to the plans they have subscribed to.

Typical ERISA Violations

Generally, ERISA violations occur when a party with certain obligations under the law fails to maintain those obligations. Therefore, this makes the following as common ERISA violations:

  • Breach of fiduciary duties towards employees under the plan
  • Improper denial of benefits to current or former employees
  • Interference with the rights of employees under the plan

Penalties and Punishment for ERISA Violations

There are two ways that a person or entity considered to have violated ERISA can be punished. This includes filing a lawsuit and through an action initiated by the Employee Benefits Security Administration.

From these two punishment methods, violators can be penalized through civil penalties that involve fines, making payment to a beneficiary, or being required to change particular procedures or practices. The second punishment method is criminal punishment, meaning that the party involved should pay a fine while the person concerned is imprisoned.

What You Need to Know About Employee Stock Ownership Plan (ESOP)

Employee Stock Ownership Plan (ESOP) is a system that allows employees of a company to acquire the right to shares of the company that they are working for. These stock options are granted for free, at a concessional rate, or a predetermined price. 

Reasons Why ESOP are Given

There are several reasons why ESOP is given to employees of a company. The most prevalent phenomenon is helping start-up companies that cannot afford to pay huge salaries to their employees but are willing to share their future prosperity with their employees. In this situation, employees are given these stock options as a form of a compensation package.

Apart from that, employees can be granted stock options to exercise on a particular future date to ensure their long-term commitment to the company. Therefore, apart from rewarding employees with monetary gains, ESOP also creates a sense of belonging and ownership. 

ESOP Rules

An ESOP is similar to a profit-sharing plan in one way or another. In ESOP, companies set up trust funds to contribute new stock or cash shares to buy any existing shares. Alternatively, a company can use ESOP to borrow money and buy new or existing shares while making a cash contribution to the program to repay the loan. A company's contribution to the trust is tax-deductible but to a particular limit.

Shares in this trust are allocated to specific employee accounts. Although some exceptions might apply, most companies allow their full-time employees aged 21 and above to participate in the program. Allocations are either made based on relative pay or some equal formula. As a result, employees acquire seniority as their rights to the shares in their account increase, which is referred to as vesting. In most cases, employees become 100% vested after three to six years, based on whether they use a cliff or gradual vesting processes.

Once employees leave a company, their stocks are returned, and the company should repurchase them at the market’s fair value. The company can buy them at a different price if their shares have a public market. Private companies should have an annual outside valuation to determine the costs of their shares. For private companies, they should compare their share price with outside valuation and make necessary adjustments.

Understanding Vesting in ESOP

ESOP vesting is when employees apply for shares of the companies they are working for against their equity grants. Employees need to read through the company's ESOP scheme documents and other related documents to understand their rights and restrictions. The ESOP scheme provides key details like ESOP pool size, exercise period, share transfer restriction, default vesting schedule, and other vital factors.

For instance, if an employee is granted 10,000 stock options with 25% of them every year for four years with an exercise period of 10 years, the employee. This means that the right to exercise these options and buy 2500 shares after one year from the option grant date. The next 25% would be vested two years from the option grant date, and so on.

Let's say that the employee does not exercise the 25% expected to be vested every year. This means that there would be a cumulative increase of the exercisable options meaning that there would be a 50% vesting option. Similarly, if the employee does not exercise in the first four years, there would be a 100% vesting option after that period, which is exercisable in full or parts.

If the employee fails to exercise the option within the exercise period of ten years, the granted options lapse and return to the ESOP pool, meaning that the employee will lose the right to purchase vested stocks. 

In case employees depart before their grants are vested, the unvested grants lapse and return to the ESOP pool. However, the employee can retain the vested options for a particular period depending on the scheme's terms and conditions. This period could be anywhere between a few months to many years.

Significant Tax Benefits of ESOP

There are major tax benefits that come with ESOP. Below are a few essential benefits of this scheme.

  1. Contributions of Stocks Are Tax-Deductible

In this case, companies can acquire current cash flow advantages once they issue their treasury or new shares to the program, meaning that the existing owners are diluted. 

  1. Cash Contributions Are Deductible

Companies can contribute cash on discretion and a year-to-year basis and take advantage of the tax deduction. This can be considered whether the contribution buys shares from their current owners or sets up a cash reserve in the program for future use.

  1. Sellers in C Corporation Can Enjoy Tax Deferral

In C corporations, ESOP owners with 30% of the company shares can reinvest the sale's proceeds in other securities.

  1. Dividends are Tax-deductible

If the dividends gained through ESOP plans are used to repay loans, they are usually tax-deductible.

  1. No Tax on Contribution to ESOP and Low Tax on Their Account’s Distribution

Workers can roll over their account distribution in their retirement plan or pay current tax on the distribution and accumulate capital gains. However, the income tax distribution is subjectable to a 10% penalty if made before the average retirement age. 

Major Drawbacks of ESOP

ESOP is not for everybody as compelling as it may sound. They have exact conditions and several limitations and liabilities. Your company's ability to utilize these plans depends on its structure, and not every company can meet these requirements. As attractive as they may seem, the tax benefits are also regulated and depend on several variables, including the structure of a business. Here are a few significant drawbacks of ESOP.

  1. High Expenses

It is essential to note that ESOP is a qualified plan governed by the Internal Revenue Code and ERISA's fiduciary and disclosure rules. This means that there are high fiduciary standards that must be met, which add additional costs to the company. These additional costs include:

  • Retaining an independent trustee, financial advisor, and legal counsel to advise the ESOP trustees
  • Engaging qualified ESOP counsel experienced with ESOP stock transactions apart from corporate counsel
  • Ongoing administrative, legal expenses, and fiduciaries associated with an ESOP that is not present in a third party sale
  • Maintaining the ESOP plan and trust document, a trustee, annual valuation of the share value, and a record keeper.
  • Monitoring who will participate in ESOP depending on Code Section 1042 election, even when they are corporation employees
  • Implementation of anti-abuse provision, under Section 409(p)
  • Obligation to a corporation to have a stock repurchase plan that requires monitoring and funding on an ongoing basis for participants eligible to receive a distribution of their ESOP stock accounts once they retire or terminate employment

  1. Lower Valuation

When an ESOP buys business shares, this is done based on a qualified firm's theoretical report. This valuation usually becomes significantly lower than what a competitive selling process can achieve with several investors and buyers. This usually depends on the kind of business involved, but in most cases, companies can achieve valuation if they sell 20-30% higher than an ESOP. 

  1. Dealing with ESOP is complicated

ESOP stock ownership is quite complicated and usually involves many unbiased opinions about its challenges since most parties benefit through third-party fees. That's why independent trustees are hired to avoid conflict of interest, manage, keep records, and take over the administration process. Apart from this, Fiduciary Liability Insurance is recommended to protect businesses against any mismanagement claims.

  1. No Turning Back

ESOP is challenging to unwind due to its broad voting and shareholding rights. A single participant can derail a fair transaction, which can end up affecting your expectation. Raising capital can also be problematic, mostly when new investors prefer to avoid diluting employees' shares or filing a lawsuit claiming that ESOP is undervaluing their company's equity.  

Class Action Lawsuits Related to Employee Retirement Income Security Act (ERISA)

Anyone can file an ERISA pension lawsuit if any of the laws that it governs is violated. It applies to both private and non-governmental entities that offer employer-subsidized health insurance and other benefits. Therefore, employers can violate ERISA if they:

  • Fail to operate the offered benefit plan prudently and exclusively to benefit their employees
  • Fail to plan asset according to the current fair market values properly
  • Fail to hold plan asset in trust
  • Fail to follow the terms of the plan
  • Take adverse actions, like termination, fines, and discrimination against employees who exercise their rights under the plan.

There are a lot of class-action lawsuits filed concerning ERISA. The most recent class-action lawsuit involves a case that has been filed in the U.S District Court for the Middle District of Florida, which names a few defendants associated with TriNet HR. TriNet is a firm involved in cloud-based professional employer organization for small and medium businesses.

This new proposed class action complaint alleges that TriNet HR had breached its requirements under ERISA in several ways by providing multiple 401(k) retirement plans to its employees. The plaintiffs involved in this class action alleged that TriNet failed to objectively and adequately review the plan's investment portfolios with care and ensure that every investment option was prudent when it comes to its cost.

The plaintiffs also claimed that the plan's fiduciaries inappropriately maintained certain funds in the program, whereas similar investment options had lower costs and better performance histories. A law firm known as Cappozi Adler represents the plaintiff, and it is quickly gaining a reputation in retirement plan service lawsuits. 

Despite the existence of this lawsuit, TriNet has not yet responded to the lawsuit filed against them. 

Class Action Lawsuits Related to Employee Stock Ownership Plan (ESOP)

Most of the lawsuits involving ESOP rises in one of the following situations:

  • When owners of a privately held company sell their stock to the ESOP at an inflated price
  • A company is facing financial difficulty, but those in charge of the ESOP do nothing about it.
  • Owners or management other than the ESOP buys the ESOP'S stock option for less than their former worth

One of the notable ESOP class-action lawsuits involves Wawa, a convenience store chain on the east coast, for allegedly forcing former employees out of the ESOP in 2014 and 2015. In doing so, the company reportedly breached its fiduciary duty since its former employees received less than the fair market value of their stock holdings, according to the suit. 

This case is separate from a similar lawsuit filed in 2016, which ended up with a $25 million settlement. This case involves a different class of plaintiffs who were separated from the company between 2011 and 2015.

The new $21.6 million settlement intends to compensate about 10,000 former employees by about $500 per share of Wawa stock that they owned. These former employees purchased approximately 44,000 shares from the company's plan, hence the massive amount of money intended to be settled. The 10,000 former employees were part of the class that filed a lawsuit against this company.

The settlement, which needs court approval, intends to resolve claims that the company improperly limited former employees' rights to stay invested in Wawa's stock option until they attain 68 years. The settlement also intended to reimburse these employees for their undervalued stock and force them out of the plan. The plaintiff settled on a settlement as early as December 2019, but the settlement's specific terms were later disclosed.

Find an ERISA/ESOP Litigation Attorney Near Me

As you have learned, ERISA and ESOP can be complicated schemes. Most people end up investing in these plans based on their lucrative profits and returns, only to be frustrated by the violations made by their employers. That's why it is recommendable to hire a professional ERISA/ESOP litigation attorney who can help you file a class-action lawsuit against the company that violates your rights.

At Consumer Alert Now, we are dedicated to ensuring that our clients' rights are upheld by vigorously representing them in their class action cases. Our lawyers are well-versed with lawsuits involving ERISA/ESOP violations and would gladly help you in your situation. For more information, contact us today at 800-511-0747 and let us help you wherever you are in the United States.