I have previously blogged on the need to ensure that your company’s cash and stock incentive plans do not become subject to the vesting and other requirements of ERISA (which would be bad, see also, Is Your Bonus Plan Subject to ERISA?). Many incentive or bonus plans make payments or deliver stock within 2½ months after the end of the year the participant became vested in order comply with the short-term deferral exception of Code Section 409A. However, some incentive plans provide for accumulations, multi-year periods, and mandatory deferrals. These plans may unwittingly become subject to ERISA’s requirements. The recent federal court decision in Miller v. Olsen, 62 EBC 1845 (D. Or. 2016), led me to conclude that another cautionary blog on this topic might be warranted.
In Miller v. Olsen, the company had established an incentive plan known as the Equity Growth Plan. The federal courts have uniformly held that equity-based compensation plans are not subject to ERISA’s vesting and other requirements. Additionally, ERISA contains a separate exception for “bonus” plans:
§ 2510.3-2(c) Bonus Program. For purposes of title I of the Act and this chapter, the terms “employee pension benefit plan” and “pension plan” shall 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. (emphasis added)
However, under the Equity Growth Plan, future payouts were to be made in cash, based on the appreciation in the value of a single property owned and managed by the company.
In Miller v. Olsen, the court found that the Equity Growth Plan was not subject to ERISA because (1) its express terms do not contemplate a method of funding; (2) its express terms do not contemplate an ongoing administrative scheme; and (3) its primary purpose is not to provide deferred compensation. Good for them. However, in other cases, with different facts, federal courts have ruled differently. So let’s be careful out there.