I try to keep my blogs brief, but last week's blog, Could Your Incentive Plan Be Subject to ERISA?, may have been too brief. Inquiring minds wanted to know more.

Regulations under ERISA provide that an incentive plan generally will be considered a “bonus program” under regulations and exempt from ERISA if it does not expressly condition payment upon termination of employment or retirement, and it does not in fact result in the systematic distribution of bonus payments upon termination or retirement. Whether an arrangement gives rise to the “systematic” deferral of payment to termination or beyond depends on the facts and circumstances of the arrangement. Some of the relevant circumstances for the determination are:

  • Whether arrangement’s design results in a high percentage of bonus payouts being made at or near recipients’ retirement age;
  • Whether the employer communicates the plan to employees as an arrangement intended to provide retirement or deferred income;
  • Whether the arrangement allows for payments of unvested amounts upon employment termination;
  • The length of the payout period; and
  • Whether the bonus payments, by operation of the plan, are made to another type of retirement account such as an IRA.

Federal court decisions have produced different results based on the facts of the particular case. Tolbert v. RBC Capital Markets Corporation went up and down between the federal district courts and the Fifth Circuit from 2013 - 2016. In 2014, the Fifth Circuit held that a company’s wealth accumulation plan (WAP) was a pension benefit plan for purposes of ERISA because the plan permitted participants to defer distributions to termination of employment or beyond. The WAP provided for participant deferrals (mandatory and voluntary) and matching contributions that were to be distributed to the participant when the amounts vested. Participants had the option, however, to defer distribution until a later in-service distribution date or until termination of employment.

In Bingham v. FIML Natural Resources LLC, 56 EBC 2232 (D. Colo. June 18, 2013), a federal district court found that if even a portion of the total benefits payable under a “bonus” plan is “systematically deferred” until termination of covered employment, the entire previous plan could be governed by ERISA. Under the incentive compensation plan offered in Bingham, participants were awarded points representing ownership interests in two separate pools of assets. Critically for the outcome of the case, payments for certain award points were withheld until the participant separated from the company (except in the event of a change in control). Because of this, the court found the deferrals met the threshold for being systematic, deeming the plan subject to all of the provisions of ERISA.

Again, let’s be careful out there.