Companies implement bonus plans to meet a variety of business objectives: retention, specific company business goals, change of control, and others. In designing bonus plans, there are a variety of legal fields that must be understood for exemption or compliance including securities, tax, ERISA, and employment. Many times, bonus plans that pay only in cash for achieving specific corporate objectives and which require services through the date of payment are exempt from onerous compliance mandates; however, if a bonus plan is found to provide retirement income or “results in a deferral of income by employees for periods extending to the termination of covered employment or beyond,” then that arrangement may be found to be a “pension plan” under ERISA Section 3(2) (29 U.S.C. § 1002(2)(A)). Once a bonus plan is subject to ERISA, it must comply with ERISA’s annual reporting, participant communications, funding, participation, vesting, and fiduciary duty requirements.
Tolbert v. RBC Capital Markets Corp., 758 F. 3d 619, (5th Cir. 2014) is one example of where the ability to defer distributions to the termination of employment or beyond was found by the court to make the plan in question a “pension plan” potentially subject to all of ERISA’s requirements. This was the case, even though the “primary purpose” of the bonus plan was not to provide retirement income.
Similar pitfalls exist under the deferred compensation rules, securities regulations, and even state labor laws.