A recent federal court decision on a subject about which I have written before produced a shocking result. In Bond v. Marriott Int’l, Inc., 56 EBC 3018 (D.Md 2013), a federal district judge in Maryland refuses to dismiss a class action lawsuit arguing that Marriott’s Stock Bonus Plan was subject to ERISA. The court’s finding that the stock bonus plan could be subject to ERISA was not surprising, as discussed below. However, what was shocking is that the Court refused to dismiss the plaintiffs’ nearly 20 year-old claims due to the statute of limitations because the plaintiff “did not understand ERISA, how it applied to the Marriott pension scheme, what the top-hat exemption consisted of, or how his Retirement Award benefits might have been affected by the application of ERISA’s substantive requirements.” (Under this rationale, the statute of limitations would bar only about 100 people in the world from bringing 20-year old ERISA claims by.) The Court also chose to ignore the plaintiffs’ previously signed release of claims for similar reasons. One would expect this decision to be overturned. However, companies can still learn a few lessons for this decision.
Between 1963 and 1990, Marriott had provided deferred stock bonus awards to management employees, which it (perhaps ill advisedly) referred to as “Retirement Awards.” Marriott provided award certificates to each recipient, which included terms of the Retirement Awards, such as the number of shares granted, grant date, vesting provisions, share distribution schedule, anti-dilution protections, forfeiture conditions, noncompetition covenants, and recordkeeping obligations. The certificates noted that a recipient would vest in the shares in pro-rata annual installments from the grant date until he or she reached age 65. The Awards also would vest upon a recipient’s death, disability, or approved early retirement.
The plan generally paid-out vested shares in ten annual installments beginning upon retirement, disability, or age 65. Retirement Awards were designed to be tax deferred, so that recipients did not have to pay taxes on them until shares were actually distributed to them from the plan. Executive compensation and benefit professionals certainly recognize the issues created by these facts.
In 1963, Marriott made Retirement Awards to only sixteen managers. “By the mid-1970s, however, Marriott had expanded its distribution of Retirement Awards to include any ‘key employee,’ and issued them to nearly a thousand employees per year with varying job titles and salaries.” In 1978, after ERISA’s passage, Marriott determined that ERISA’s vesting requirements were inapplicable to Retirement Awards because the awards fell within the top-hat exemption. That same year, Marriott issued a Prospectus to Retirement Award recipients (publicly traded companies must distribute to shareholders and share recipient a prospectus when they sponsored stock-based employee benefit plans). Marriott’s 1978 Prospectus included a paragraph acknowledging on the ERISA status of the Stock Bonus Plan:
The Incentive Plan is an “employee pension benefit plan” within the meaning of [ERISA]. However, inasmuch as the Plan is unfunded and is maintained by the Company primarily for the purpose of providing deferred compensation for a selected group of management or highly compensated employees, it is deemed a “select plan” and thus is exempt from the participation and vesting, funding and fiduciary responsibility provisions of Parts 2, 3, and 4 respectively of Subtitle B of Title 1 of the Act. The reporting and disclosure provisions of Part 1 of Subtitle B of the Act continue to apply and under Section 2520.104-23 of the regulations, the Company has filed a statement with the Department of Labor providing certain information with respect to the Incentive Plan. The Company will not extend to participants any of the protective provision of the Act for which an exemption may properly be claimed.
By the mid-1980s, several thousand Marriott employees again were receiving Retirement Awards each year. In May of 1990, the United States Department of Labor (DOL) issued an advisory opinion concerning ERISA’s top-hat exemption (Opinion 90-14A). In this opinion, DOL provided that the top-hat exemption was designed for top-level executives capable of negotiating their own deferred compensation packages and who did not need ERISA’s substantive protections, and provided that a plan that extends coverage “beyond ‘a select group of management or highly compensated employees’ would not constitute a ‘top hat’ plan.”
Shortly after DOL’s 1990 advisory opinion, Marriott replaced Retirement Awards with another form of stock award that deferred payment until the recipient’s termination from employment and restricted eligibility for the award to “associates with a pay grade of 56 and above.” As a result of this restriction, the number of Marriott employees receiving ERISA-governed stock awards dropped from roughly 2,500 in 1989, to less than 100 in 1990.
Marriott informed participants of the amendments to its pension plan in a November 1990 memorandum indicating that “Requirements under [ERISA] have prompted recent changes to the way in which Marriott associates may request their award payments.” The memo announced the eligibility changes and other changes in how awards were calculated, distributed, and subject to noncompetition provisions. As required, Marriott disclosed the new stock plan to shareholders (including plan participants) in its 1991 Proxy Statement, and shareholders voted to approve the plan.
However, two former Retirement Award recipients, Dennis Bond and Michael Steigman, sued Marriott, on behalf of all Award recipients, to force Marriott to reform the vesting terms of the Retirement Awards to comply with ERISA, and to collect the additional benefits that recipients would have been entitled to under ERISA-compliant vesting schedules. Bond had left Marriott in 1991 after 18 years of employment. He had received Retirement Awards in 1976, 1977, 1978, 1979, 1988, and 1989. When Bond left Marriott in 1991, he was two years away from being fully vested in his awards because he would have had 20 years of service. In 2006, more than three years before filing this lawsuit, the plan paid Bond all of his vested shares based upon the vesting schedule provided in the awards. Steigman had worked at Marriott for 17 years from 1973 until Marriott asked him to resign in 1990. Steigman received deferred stock bonus awards in 1974 and 1975. When Steigman left Marriott in 1990, he signed a release of all claims against Marriott. Shortly after his termination from employment with Marriott in 1991, and 20 years before he joined this case as a named Plaintiff, Marriott paid Steigman all of the vested shares due under the terms of his deferred stock bonus award.
Marriott last granted deferred stock bonuses in 1990, and the plan had paid out the majority of bonus stock award recipients, like Bond and Steigman, before they filed this lawsuit. At the time plaintiffs filed this lawsuit only, 502 of the more than 8,000 bonus award recipients had not been fully paid their vested bonus award shares.
A plan that provides retirement income to employees, or results in a deferral of income by employees for periods extending to the termination of covered employment or beyond would be a “pension benefit plan” under ERISA. In general, any pension benefit plan that is subject to ERISA must comply with the ERISA’s requirements for reporting and disclosure, participation and vesting, minimum funding, fiduciary responsibilities and civil and criminal enforcement. ERISA provides an exception for nonqualified plans that fit within either the “top-hat plan” or “excess benefit plan” exemptions. ERISA Regulations §2530.104-25 describes a “top-hat plan” as an unfunded plan that is “primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees.” (The courts have not uniformly followed the strict reading of Opinion 90-14A.)
Like Marriott, companies that contribute 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 competition. 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.
Plaintiff’s lawyers began arguing that a company's non-qualified deferred compensation plans was subject to ERISA’s more stringent vesting schedules because it did not qualify as a top hat plan in the 1990s. Still one of the most troubling cases in this area is Carrabba v. Randalls Food Market, Inc. 38 F.Supp.2d 468 (N.D. Texas 1999), aff'd 252 F3d 721 (5th Cir. 2001). In the Carrabba case, after acknowledging it could not articulate the meaning of the phrase “select group,” the Texas Court stated that all that it could do in this regard was to “express the conclusion that it cannot find from the evidence that the participant of the MSP was a select group out of the broader group of management employees or the broader group of highly compensated employees.” Expressed differently, if a plan covered all of its management and highly compensated employees, the plan would not be a “select” group of management, e.g., the determination whether a group is select is not made on the basis of the work force as a whole, but rather vis-à-vis management. At the time, this case this appeared to be an aberration. However, it has not been overturned and has encouraged clever plaintiffs’ lawyers.
Thus, the Maryland Court’s finding that Marriott’s stock bonus plan could be subject to ERISA was not surprising. However, it remains shocking that the Court refused to dismiss the plaintiffs’ nearly 20 year-old claims due to the statute of limitation. Lacking any other basis for this unusual result, the Court argued that “Marriott did not adopt an administrative claims procedure until after the Plaintiffs filed this lawsuit, and so it was impossible for the Plaintiffs to participate in any internal benefit claims determination, receive a formal denial therefrom, and accrue a cause of action.”
This would be an excellent time to review the coverage of your non-qualified pension and deferred compensation plans.