We received several questions on Tuesday’s Blog “Court Finds that Company’s Stock Bonus Plan May Be Subject to ERISA and that No Statute of Limitations Applies.” The questions and comment primarily related to the last sentence, which read: “This would be an excellent time to review the coverage of your non-qualified pension and deferred compensation plans.”  Readers with inquiring minds wanted to know more about the issue and how to review their plans.

The issue is that employers that make contributions to their non-qualified deferred compensation plans typically impose a vesting schedule that is at least as strict as the schedule in their qualified retirement plans. Many employers apply a stricter schedule, including the threat of forfeiture for "bad boy" terminations or breach of a non-compete/non-solicit. Courts will uphold the vesting schedule and forfeiture provisions of an employer's non-qualified deferred compensation plan, but only as long as that plan is exempt from ERISA as a "top-hat" plan. To be exempt as a top-hat plan, the non-qualified deferred compensation plan must limit eligibility to "a select group of management or highly compensated employees." The informal list of key factors for determining whether the plan limits coverage to a select group, which I have collected over the years, based on existing case law, DOL views, and experience with clients, is as follows:

  1. Number of employees covered by the plan.
  2. Percentage of total workforce covered by the plan.
  3. Compensation of lowest levels of employees covered by the plan and the location of the employees covered by the plan (e.g., $100,000 annual compensation means something different in Manhattan, NY than it does in Manhattan, Kansas).
  4. Title/responsibilities of covered employees.
  5. Extent to which the employees were "selected" by the Board or management - as opposed to being covered because they fall within a general plan definition. (Note, the latter situation could be countered by evidence showing the selection process preceded the definition.)
  6. Extent to which covered employees have a say in management or any other ability to influence management decisions.

It never hurts to review the coverage of your non-qualified deferred compensation plan from time to time to ensure that it still satisfies these requirements.