Pension & Benefits News Executive loses bid to characterize employer's deferral scheme as ERISA-exempt bonus plan
Friday, November 8, 2019

Executive loses bid to characterize employer's deferral scheme as ERISA-exempt bonus plan

By Pension and Benefits Editorial Staff

The U.S. Court of Appeals in Cincinnati (CA-6) has determined that a deferral scheme, which was intended by its terms to be treated as an ERISA nonqualified plan and which permitted both in-service and post-termination distribution elections, was an employee pension benefit plan under ERISA Sec. 3(2)(A)(ii) and not a bonus plan exempted under ERISA Reg. §2510.3-2(c). As a result, ERISA preempted the state law breach of contract and negligent misrepresentation claims filed by a former senior executive arising from the employer's alleged mismanagement of the deferred compensation plan.

Plan terms. The employer's plan permitted eligible executives to defer two types of income: (1) compensation (defined as a participant's base annual salary and any annual or long-term bonuses) and (2) “TIP” amounts, which were bonus payments available under a separate arrangement to executives in return for their successful efforts to secure a buyer for the company. By its express terms the employer's plan was intended to be a “program of deferred compensation within the meaning of Title I of ERISA.”

The plan also contained a default distribution provision specifying that deferred income would be distributed after a participant's termination from employment. It also provided for the election of in-service distributions within certain limits.

Tax troubles. A senior executive who participated in the successful sale of the company participated in the plan. By 2014, having left the company in 2008, the executive had deferred compensation totaling over nine million dollars. In 2014, the IRS determined that due to his failure to comply with Code Sec. 409A, the executive owed additional income taxes and had incurred substantial tax penalties.

The executive filed suit in state court against the employer asserting state law claims for breach of contract and negligent misrepresentation. The district court, siding with the employer, determined that ERISA preempted the state law claims.

Plan covered by ERISA. The Sixth Circuit affirmed the lower court’s grant of summary judgment to the employer, concluding that ERISA preempted the state law claims. ERISA Sec. 3(2)(A)(ii) covers any plan “that by its express terms or as a result of surrounding circumstances…results in a deferral of income by employees for periods extending to the end of covered employment or beyond.” Contrary to the executive's argument, the court explained that the statutory language does not categorically exclude all plans that contain options to receive in-service distributions or to make other deferral elections.

The court also rejected the executive's assertion that the plan falls under the bonus plan exemption from ERISA coverage found in ERISA Reg. §2510.3-2(c). Under the regulation, employee pension benefit plans do not include “payments made by an employer to some or all of its employees as bonuses for work performed, unless such payments are systematically deferred to the termination of covered employment or beyond, or so as to provide retirement income to employees.”

Unlike other plans found to be bonus plans, the court explained, the employer's plan did not state an intention to provide financial incentives for employee performance or retention and did not explicitly operate as a bonus plan. The plan also permitted deferral of several types of employee income: participant's base salaries, annual bonuses, and the TIP amount. The court agreed with the lower court's conclusion that the executive had conflated the deferred compensation plan, upon which the complaint rests, with the TIP arrangement with the executives.

SOURCE: Wilson v. Safelite Group, Inc. (CA-6).

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