A recent court case drew our attention to an issue we haven’t blogged on for several years: whether ERISA requirements apply to a company’s bonus plan. The Fifth Circuit, in Tolbert v. RBC Capital Markets Corporation, 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. 

For some compensation and benefit plans, employers want the protections (and obligations) that ERISA provides. However, for other plans, employers must avoid ERISA coverage at all costs. The key is to know which is which. Regulations under ERISA exclude from coverage “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.” The application of this exclusion depends on the particular facts and circumstances of the arrangement, particularly whether the arrangement results in a deferral of income to the termination of employment. The U.S. Department of Labor has stated that a bonus arrangement will generally 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 if 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, again, on the facts and circumstances of the arrangement. Some of the relevant circumstances for the determination are:

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

In Tolbert, 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. 

So why is ERISA coverage of the WAP relevant? Three plaintiffs who forfeited their WAP benefits upon termination of employment (two of whom were financial consultants at the company and one of whom was an administrative assistant) sued to recover those benefits by claiming that the WAP’s forfeiture provisions violated ERISA. The company argued that the plan was not subject to ERISA because it was not a pension benefit plan. The Fifth Circuit disagreed and remanded the case to the District Court to determine if the WAP qualifies for another exception from ERISA, the “top hat” plan exemption (which this blog has discussed many times before). If the WAP does not qualify for the “top hat” plan exemption, it may not be able to cause the forfeiture of plaintiffs’ benefits (and other bad things could happen).