Appellate ruling highlights potential to apply ERISA to nonqualified deferred compensation plans

Roman ColumnsA ruling by the Fifth Circuit Court of Appeals highlights that ERISA requirements, including fiduciary duties, vesting rules and funding requirements, could apply to nonqualified deferred compensation plans.

In the Fifth Circuit’s July 14 decision in Tolbert et al. v. RBC Capital Markets Corp., No. 13-20213 (5th Cir. 2014), the court ruled that a nonqualified deferred compensation plan offered by an employer was an “employee pension benefit plan” under the Employee Retirement Income Security Act of 1974 (ERISA) because it resulted in the deferral of income by employees extending to the employees’ termination from employment or beyond, under ERISA section 1002(2)(A)(ii).

The plaintiffs in Tolbert each forfeited their wealth accumulation plan (WAP) benefits offered by RBC Capital Markets Corp. (RBC) for various specific reasons. They brought suit against the RBC arguing that the forfeitures violated ERISA. A federal district court granted the RBC’s summary judgment motion, ruling that the WAP was not an employee pension benefit plan subject to ERISA, but on appeal, the Fifth Circuit reversed.

The issue before the Fifth Circuit was a narrow one: whether, under ERISA section 1002(2)(A), the WAP (i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond. The plaintiffs asked the court to take a liberal view of ERISA, namely that if the plan offers employees the opportunity (either through the express terms or surrounding circumstances) to defer compensation until retirement, separation or beyond, the plan is treated as an employee pension benefit plan under ERISA.

The RBC argued that the WAP isn’t subject to ERISA because the primary purpose of the plan is to attract and retain talent by awarding bonuses and other incentives, and not to provide retirement or deferred post-termination income. Citing the WAP’s plan document and prior case law, the court ruled that under ERISA section 1002(2)(A)(i), the WAP doesn’t provide retirement income to employees, because it wasn’t designed for that purpose.

However, under ERISA section 1002(2)(A)(ii), the WAP does result in a deferral of income by the employees for periods extending to their termination of employment or beyond. The court rejected the view that the plan must be designed for the purpose of paying retirement or post-termination income under subsection (i) for subsection (ii) to also apply, holding that the subsections are separate and distinct under a plain reading of the statute.

Subject to ERISA
The Fifth Circuit reasoned that the WAP was a pension plan subject to ERISA based on the statute and prior case law. In Boos v. AT&T, 643 F.3d 127 (5th Cir. 2011), the Fifth Circuit held that to establish coverage under ERISA section 1002(2)(A)(ii), employees of a plan “must show that they forewent income at some point in exchange for receiving income from [the plan] at a later date.” Those factors, coupled with the express terms of the WAP, compelled the Fifth Circuit to conclude that the WAP was subject to ERISA.

Specifically, the statement of purpose in the WAP’s plan document described the WAP as a “deferred compensation plan” and stated that employees would have the right to “defer receipt of a portion of their compensation to be earned with respect to the upcoming Plan Year.” The WAP also included provisions that plainly referred to the deferral of income.

Top hat plan
One issue the Fifth Circuit did not decide was whether the WAP was an exempt “top hat” plan. A top hat plan is unfunded and maintained primarily to provide deferred compensation for a select group of management or highly compensated employees. This type of plan is exempt from various requirements imposed by ERISA, such as fiduciary duties and vesting requirements. A plan with coverage that is broader than a select group of management or highly compensated employees will not qualify for exemption from ERISA.

The WAP’s plan document included a statement alluding to the two prongs of the top hat test under ERISA section 1101(a)(1), but the Fifth Circuit remanded the case to the district court to decide whether the plan meets those requirements. The Department of Labor has never issued formal guidance on what constitutes a top hat plan. Thus, it has been up to the courts to settle controversies between parties regarding whether a plan is a top hat plan.

The Fifth Circuit’s decision in Tolbert has implications for nonqualified deferred compensation plans, like the WAP offered by RBC. Employers should evaluate whether their plans could be subject to ERISA under the Tolbert decision.

If plans like the WAP are employee pension benefit plans under ERISA, the plans must rely on the top hat exemption to avoid having to comply with various ERISA requirements. Thus, employers must carefully evaluate the top hat exemption. This is a challenge, given the lack of formal guidance from the DOL. Employers must look to case law to evaluate a plan’s top hat status.   

Eddie Adkins

Jeff Martin

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