Retirement plan sponsors are constantly reminded of the many potential liabilities imposed on them by the labyrinthine ERISA statutory scheme, from minimum standards for participation, vesting and funding to the requirement of a claims and appeals process within each plan. However, despite the already existing complexities of ERISA, plan sponsors sometimes include unnecessarily exacting plan provisions that create employer obligations – and hence liability -- where none might have existed otherwise.
Take the recent case of Davidson v. Henkel Corp., 2015 BL 1384, E.D. Mich., No. 4:12-cv-14103-GAD-DRG, 1/6/15, which involved the backfiring of a plan’s tax withholding provision. In that case, Henkel Corporation established a “Top Hat” plan subject to ERISA designed to allow a select group of management or highly compensated employees to defer compensation until retirement. Plaintiff in the case retired in 2003 and began receiving a monthly supplemental benefit under said plan at that time. In 2011, Henkel discovered that FICA taxes associated with the deferred compensation had not been properly withheld and informed all participants that FICA taxes on payments from 2008 and beyond would be paid by adjusting participants’ monthly payments accordingly on a going forward basis. Had the FICA taxes been paid earlier, the subsequent plan distributions would have been exempt from FICA taxation. Because of this ongoing FICA taxation obligation, participants’ plan benefits were less than they would have been had FICA taxes been paid on deferral. Plaintiff commenced an action to halt this adjustment, including a civil enforcement claim and an equitable estoppel claim pursuant to Section 502(a) of ERISA.
Both parties moved for summary judgment. Henkel argued that it met its obligations under the Internal Revenue Code by following an allowable procedure for withholding under the Code, regardless of the fact that this ultimately resulted in higher FICA taxes to participants. The Court agreed that Henkel did not violate the Code by providing for catch-up withholding, but noted that “[i]ntrinsically, this case is not about taxes, but is instead about Defendants’ administration of the Plan.”
In particular, the Court focused on a sentence in Henkel’s plan which stated that “the company shall ratably withhold from that portion of the Participant’s compensation that is not being deferred the Participant’s share of all applicable Federal, state or local taxes.” The Court interpreted this sentence, which was not required to be included in the plan by ERISA or any other law, as creating an affirmative obligation for Henkel to withhold FICA taxes at an earlier time (although we aren’t sure we agree), almost adopting a fiduciary requirement to act solely in the best interests of plan participants (but, of course, top hat plans are exempt from ERISA’s fiduciary duty rules). The court found that Henkel violated the plan’s terms and was thus liable to participants.
What is notable about the case is not that Henkel failed to meet one of the many obligations imposed upon it by ERISA or the Code, but quite the opposite: Henkel effectively appears to have created its own liability by including a sentence in its plan that, in the court’s view, obligated it to do more than ERISA or the Code required. Plan sponsors should be wary when drafting or amending their plans of including such extraneous provisions lest they manufacture liability where none might otherwise have existed.