20.3 Workers' Compensation, Pension & Profit-Sharing Plans
Key Takeaways
- NALS lists workers' compensation and pension and profit-sharing plans as two separate areas of law under Part 4 Legal Knowledge.
- Workers' compensation is a no-fault system: the worker gives up the right to sue the employer in tort and receives scheduled benefits without proving negligence, which is the exclusive remedy bargain.
- Compensability requires an injury arising out of and in the course of employment, and the two prongs test causal connection and time-place-circumstance separately.
- ERISA governs private employer-sponsored retirement and welfare plans, imposing fiduciary duties, vesting rules, reporting and disclosure through the summary plan description, and a claims procedure that must be exhausted.
- A defined benefit plan promises a formula-based retirement benefit and shifts investment risk to the employer, while a defined contribution plan promises only the account balance and places that risk on the participant.
20.3 Workers' Compensation, Pension & Profit-Sharing Plans
[!NOTE] NALS PP Exam Blueprint Focus: The Part 4 Legal Knowledge list names both workers' compensation and pension and profit-sharing plans. They share a structural feature worth noticing: each replaces an ordinary common law remedy with a statutory system that has its own forum, its own deadlines, and its own vocabulary.
Part One: Workers' Compensation
The Bargain
Workers' compensation is a no-fault statutory system created state by state in the early twentieth century. Each side gave something up:
| The employee gives up | The employee gets |
|---|---|
| The right to sue the employer in tort | Benefits without proving fault |
| Pain and suffering damages | Prompt, predictable, scheduled compensation |
| Punitive damages | Medical treatment paid in full, ordinarily with no deductible |
| The employer gives up | The employer gets |
|---|---|
| Common law defenses — contributory negligence, assumption of risk, the fellow servant rule | Exclusive remedy protection from tort suits |
| Certainty of paying for every workplace injury | Capped, predictable exposure |
The exclusive remedy doctrine is the core: workers' compensation is ordinarily the injured worker's only remedy against the employer.
Compensability: Arising Out Of and In the Course Of
Both prongs must be satisfied, and they test different things.
| Prong | What it asks |
|---|---|
| Arising out of employment | Is there a causal connection between the employment and the injury — did the work create the risk? |
| In the course of employment | Did the injury occur within the time, place, and circumstances of the employment? |
Recurring application problems:
| Scenario | Typical result |
|---|---|
| Injury commuting to work | Not compensable under the going-and-coming rule |
| Injury while traveling on a work errand | Compensable |
| Injury on a personal detour during a work trip | Not compensable during the deviation |
| Injury at an employer-mandated event | Generally compensable |
| Injury at a purely voluntary social event | Generally not |
| Horseplay by the instigator | Often not compensable |
| Horseplay injuring a non-participant | Generally compensable |
| Intoxication as the cause | Commonly barred by statute |
| Intentional self-inflicted injury | Barred |
| Occupational disease from cumulative exposure | Compensable under most acts, with special notice and limitations rules |
| Repetitive stress injury | Compensable in most states |
| Mental injury from mental stimulus alone | Varies widely; many states restrict or exclude |
Benefit Categories
| Benefit | What it covers |
|---|---|
| Medical | Reasonable and necessary treatment, usually with no employee cost share |
| Temporary total disability | Wage replacement while the worker cannot work at all during healing |
| Temporary partial disability | Partial wage replacement during light-duty or reduced-hours work |
| Permanent partial disability | Compensation for lasting impairment, often under a statutory schedule assigning weeks of benefits to specific body parts |
| Permanent total disability | Long-term or lifetime benefits where the worker cannot return to gainful employment |
| Vocational rehabilitation | Retraining and job placement services |
| Death benefits | Payments to dependents plus a burial allowance |
Wage replacement is typically calculated as a percentage — commonly around two-thirds — of the average weekly wage, subject to statutory maximums and minimums.
Maximum medical improvement is the pivot point in a claim: the date the condition has stabilized, after which the focus shifts from temporary wage replacement to rating permanent impairment.
The Claim Process
- Notice to the employer, within a statutory period that is often short.
- Employer report to the carrier and the state agency.
- Claim filing with the state commission or board within the statutory limitations period.
- Acceptance or denial by the carrier.
- Independent medical examination, where the carrier disputes the treating physician.
- Mediation or informal conference, in many states a required step.
- Hearing before an administrative law judge or commissioner.
- Administrative appeal to the full commission or board.
- Judicial review in the state courts.
- Settlement, by compromise and release or by stipulated award, subject to commission approval.
Exceptions to Exclusivity
Exclusive remedy protection is broad but not absolute:
- Intentional torts by the employer, under standards that vary from actual intent to injure to substantial certainty of harm.
- Third-party claims — a suit against a negligent driver, a machine manufacturer, or a premises owner is unaffected, subject to the carrier's subrogation lien on the recovery.
- Dual capacity, where the employer acted in a second, independent role such as product manufacturer.
- Uninsured employers, who in most states lose the exclusivity defense entirely.
- Bad faith claims handling, actionable separately in some states.
Federal systems run parallel to the state acts: the Federal Employees' Compensation Act for federal workers, the Longshore and Harbor Workers' Compensation Act for maritime workers who are not seamen, and the Federal Employers' Liability Act for railroad workers, which is a fault-based negligence system rather than a no-fault one.
Part Two: Pension & Profit-Sharing Plans
ERISA
The Employee Retirement Income Security Act of 1974 governs most private employer-sponsored retirement and welfare benefit plans. It does not require an employer to offer a plan; it regulates plans that are offered. Governmental and most church plans are excluded.
ERISA's four pillars:
- Reporting and disclosure to participants and the government.
- Participation, vesting, and benefit accrual minimums.
- Fiduciary responsibility standards.
- Enforcement, including a civil action to recover benefits, enforce rights, and obtain equitable relief.
Plan Types
| Defined benefit plan | Defined contribution plan | |
|---|---|---|
| Promise | A formula-based benefit at retirement, often a percentage of final average pay times years of service | Whatever the account balance turns out to be |
| Investment risk | On the employer | On the participant |
| Examples | Traditional pension; cash balance plan | 401(k), profit-sharing plan, money purchase plan, ESOP, 403(b) |
| Termination insurance | Insured by the Pension Benefit Guaranty Corporation, within limits | Not insured |
| Funding | Actuarially determined employer contributions | Employer and employee contributions to individual accounts |
A profit-sharing plan is a defined contribution plan funded by discretionary employer contributions allocated among participant accounts under a definite formula. Contributions need not depend on actual profits.
Fiduciary Duties
An ERISA fiduciary is anyone who exercises discretionary authority over plan management or assets or renders investment advice for a fee. Duties:
| Duty | Standard |
|---|---|
| Loyalty | Act solely in the interest of participants and beneficiaries, for the exclusive purpose of providing benefits and defraying reasonable expenses |
| Prudence | The care, skill, prudence, and diligence of a prudent person familiar with such matters |
| Diversification | Diversify investments to minimize the risk of large losses, unless clearly prudent not to |
| Adherence to documents | Follow the plan documents to the extent consistent with ERISA |
Prohibited transactions between the plan and parties in interest are barred unless an exemption applies, and fiduciaries are personally liable for losses resulting from a breach.
Participation, Vesting & Accrual
Participation minimums typically allow a plan to require attainment of age 21 and completion of a year of service.
Vesting is the point at which a benefit becomes nonforfeitable. Employee contributions are always immediately vested. Employer contributions vest under a permitted schedule — a cliff schedule under which the benefit becomes fully vested at once after a set period, or a graded schedule vesting in increments over a period of years.
Reporting and Disclosure
| Document | Purpose |
|---|---|
| Summary plan description (SPD) | Plain-language explanation of eligibility, benefits, claims procedures, and rights; furnished to participants |
| Summary of material modifications | Notice of plan amendments |
| Annual report (Form 5500) | Financial and operational data filed with the government |
| Summary annual report | Participant-facing summary of the annual report |
| Individual benefit statement | Accrued and vested benefits for the participant |
| Notice of significant benefit accrual reduction | Advance notice of a material reduction in future accruals |
Claims and Appeals
ERISA requires a reasonable claims procedure with written notice of denial explaining the specific reasons and the plan provisions relied on, a description of any additional information needed, and the review procedure. A claimant must ordinarily exhaust the plan's internal appeal before suing.
Judicial review is deferential where the plan grants the administrator discretionary authority to determine eligibility and construe plan terms, in which case the court reviews for abuse of discretion rather than deciding the claim afresh.
Qualified Domestic Relations Orders
ERISA plans carry an anti-alienation rule barring assignment of benefits, with a narrow exception for a qualified domestic relations order. A QDRO is a domestic relations order that creates or recognizes an alternate payee's right to receive plan benefits and satisfies specific content requirements: it must name the participant and alternate payee with addresses, state the amount or percentage and the number of payments or the period, identify the plan, and it may not require the plan to provide a type or form of benefit, or increased benefits, not otherwise available.
The plan administrator determines whether an order is qualified. A family law paralegal drafting a property settlement should route the draft order to the plan administrator for pre-approval before entry, because a rejected order after divorce is final is expensive to fix.
COBRA and Health Continuation
The Consolidated Omnibus Budget Reconciliation Act requires group health plans of employers with 20 or more employees to offer continuation coverage after a qualifying event.
| Qualifying event | Typical maximum continuation |
|---|---|
| Termination other than for gross misconduct, or reduction in hours | 18 months |
| Divorce or legal separation; death of the covered employee; a child ceasing to be a dependent; the employee's Medicare entitlement | 36 months for qualified beneficiaries |
The qualified beneficiary generally pays the full premium plus a small administrative percentage. Notice obligations run in both directions: the employer notifies the plan administrator of certain events, the beneficiary notifies the plan of a divorce or dependent status change, and the plan then issues the election notice. Missed notice deadlines are the most common COBRA failure.
A delivery driver is injured when another motorist runs a red light and strikes the company van during a scheduled delivery route. What remedies are available?
A divorcing spouse is awarded half of the participant's 401(k) balance in the property settlement. What must happen for the plan to pay the alternate payee?
An employer sponsors a plan promising each participant a monthly retirement benefit equal to 1.5% of final average pay times years of service. Investment returns fall well short of projections. Who bears the shortfall, and what protection applies on plan termination?