Last month, the U.S. Court of Appeals for the Fifth Circuit found in Tolbert v. RBC Capital Markets that a nonqualified deferred compensation plan was an "employee pension benefit plan" under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The plan, which was sponsored by RBC Capital Markets Corporation and other related entities ("RBC"), was similar in design to many plans used by financial services industry employers to improve employee retention. The case is noteworthy (and troubling) because such plans are generally viewed as exempt from ERISA.

The Plan

The plan provided for voluntary and mandatory employee deferral contributions and matching and discretionary employer contributions. Voluntary deferral contributions vested immediately, while mandatory deferral contributions and employer contributions vested over time. Employees could elect to have vested amounts distributed during employment or upon termination of employment (in either a lump sum or installments). Employees generally forfeited unvested amounts upon termination of employment. Employees terminated for cause also forfeited vested mandatory deferral contributions and employer contributions. One plaintiff, a former administrative assistant, forfeited vested amounts when she was terminated for cause. The other two plaintiffs, former financial consultants, forfeited unvested amounts when they resigned.

Lower Court Decision

In order to challenge the forfeiture of their plan benefits, the plaintiffs first had to establish that the plan was an ERISA pension plan that was not a "top hat" plan. (Top hat plans are exempt from ERISA's vesting, funding and fiduciary duty requirements.) The lower court found that the plan was not a pension plan and dismissed the case without deciding whether the plan was a top hat plan.

Fifth Circuit Decision

The Fifth Circuit held that the plan was a pension plan under ERISA, which provides that a plan is a pension plan "to the extent that by its express terms or as a result of surrounding circumstances … [the plan] results in a deferral of income by employees for periods extending to the termination of covered employment or beyond." The court cited plan language describing the plan as a "deferred compensation plan" under which employees had the option to defer receipt of their compensation. The court also pointed to the plan terms "Voluntary Deferred Compensation" and "Mandatory Deferred Compensation" as "terms that plainly refer to income that is deferred." The court then cited the plan's vesting and distribution provisions as evidence that the plan contemplated deferral of income "to the termination of covered employment or beyond."

The Fifth Circuit sent the case back to the lower court to decide whether the plan is a top hat plan and therefore exempt from ERISA's vesting requirements. (The fact that the plaintiffs include an administrative assistant suggests that the top hat plan exemption may not apply.) If the top hat exemption does not apply, RBC will have to undo any forfeitures of plan benefits that did not comply with ERISA and might be required to fund the plan, which could result in adverse income tax consequences to employees.

Next Steps

The Fifth Circuit seems to have taken the position that a nonqualified deferred compensation plan is an ERISA pension plan if it permits deferral of compensation to termination of employment. Employers who operate in the Fifth Circuit (which comprises Texas, Louisiana and Mississippi) should examine their nonqualified deferred compensation plans to determine whether those plans would be vulnerable if challenged under this decision and whether amendments or operational changes would make such plans more likely to qualify for the top hat plan exemption. King & Spalding would be pleased to assist you with such a review or to answer any questions about this case.