Matching Contributions to 401(k) not included in Wage Calculation in Iowa

The Iowa Supreme Court, in an issue of first impression,  recently held that an employer’s matching contributions to an employee’s 401(k) plan are not part of weekly earnings for wage and benefit rate purposes.  Evenson v. Winnebago Industries, No. 14-2097 (Iowa June 3, 2016) The deputy commissioner had initially held  the employer contributions to the employee’s  401k plan were a fringe benefit and therefore not included in the calculation of average weekly gross earnings in workers’ compensation claims. This was  affirmed by  the Commissioner, and then the  District Court.

In its analysis, the Court first examined the  terms used in  Section 85.36 of the Iowa Code, which  defines “weekly earnings” as including “gross salary, wages, or earnings.” The Court looked to  Webster’s Dictionary  for the commonly understood meaning of each of these three terms.  From the   ordinary meaning of the words salary, wage, and earnings, the Court concluded that an employer’s matching contribution to an employee’s 401k plan was not meant to be included in weekly earnings as defined in Section 85.36.   The Court  observed that, unlike salary, wage, or earnings, an employer’s contribution to a 401k plan is not dependent upon the hours the employee works, but rather  upon the employee’s choice and participation. It is the  employee who first chooses whether and how much to participate in the 401k plan, and only after that  choice does  the employer match the contribution to the plan.

The Court also examined the exclusionary language of Sec. 85.61(3),  which specifically excludes  an employer’s contribution for welfare benefits from gross earnings. The Court again relied upon Webster’s dictionary to arrive at this  conclusion.   After  discussing the dictionary definition of each separate word,  the Court  reasoned that welfare and benefits   should be considered together, and that together, welfare benefits mean something extra given to an employee for their well-being.  The Court stated that an employer’s matching contributions to a 401k plan are in fact something extra, since they are in addition to  the employee’s normal, earned wages, and they provide assistance for employees in planning for retirement.

The Court  further noted that Iowa Code Sec. 85.61(9)  defines  spendable weekly earnings  as “that amount remaining after payroll taxes are deducted from gross weekly earnings.”   The Court observed that an employer’s matching contribution does not fit this definition since it is not subject to payroll taxes, and an employee who receives a matching contribution to their 401k plan cannot immediately spend the contribution at the time it is paid, unlike a regular weekly wage.

Therefore  based upon the plain ordinary meaning  of salary, wage , and earnings used in Sec. 85.36 , coupled with the specific exclusion of welfare benefits from  weekly earnings in Sec. 85.61(3), and the definition of spendable earnings given  in  Sec. 85.61(9), the Court concluded that the legislature must have intended to exclude employer contributions to 401k plans from the definition of gross earnings.  As further support , the Court cited the leading U.S. Supreme Court case on fringe benefits Morrison-Knudsen, which held that an employer’s contributions to a union trust fund for health and welfare, pensions, and employee training were not considered wages for the purposes of calculating weekly benefits under  the District statute.   In so deciding, the Morrison-Knudsen Court explained that such benefit funds  cannot be readily converted to a cash equivalent in the same way as regular wages can.

The Evensen Court concluded that their decision is consistent with the  majority trend  to treat an employer’s matching contribution to a 401k plan as a welfare benefit that falls under the category of “fringe benefits,” and thus is not included in the calculation of weekly benefits for workers’ compensation purposes.  The Court acknowledged that a few states have changed their workers’ compensation statutes to include retirement plans in the definition of fringe benefits, however the Iowa legislature has not done so.

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Thanks to partner Terry Donohue for the summary of this important Iowa case. Terry handles Iowa claims for the firm and works out of the Chicago and Des Moines offices of Inman and Fitzgibbons.  Please feel free contact Terry with any Iowa workers’ compensation questions.

 

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