Illinois ERISA Lawyer Blog

Executives in Chicago and the Midwest, especially working for small to mid-size employers, often negotiate into their employment agreements some form of deferred compensation and/or severance compensation. Until the relationship between executive and employer sours, the parties only think about the tax considerations of executive compensation. But when there is a dispute between employer and executive, and the executive must take measures to enforce the agreement, the question becomes whether the compensation is covered by ERISA or not. Results are mixed, and always turn on a fact specific inquiry. Consequently, there are no hard and fast rules.

One such executive recently filed a complaint in state court and faced a motion to remove to Federal court under ERISA by his former employer. See Hoffner v. Bank of Choice Holding Co., No. 11-266 (D. Colo. June 21, 2011). In that case, the bank entered into an "Executive Salary Continuation Agreement" with Mr. Hoffner, whereby the bank would pay Hoffner $50,000 for ten years upon retirement and reaching age 65. But if Hoffner voluntarily terminated his employment prior to reaching age 65, he would receive the balance of an accrued liability account--an unfunded account maintained on the bank's books recording a liability to pay Hoffner's post-retirement compensation. But nothing in the record suggested how the bank accrued the liability, whether on a straight line method or otherwise. The agreement only provided that the bank would place "appropriate reserves" in the accrued liability account.

The court ultimately held the parties' deferred compensation agreement did not meet the definition of an ERISA-governed plan. The court applied the element test of the seminal case, Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982). The court held the intended benefits were not reasonably ascertainable, there was not a reasonably ascertainable class of beneficiaries, and there was not a sufficient ongoing administrative scheme (see Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987)). The court rejected the bank's argument that only the kind of benefits should be reasonably ascertainable, rather than the amount. Also, nothing suggested these benefits were provided to a class of beneficiaries--they were only provided to this one employee. Note, however, that other courts have held there could be a "class of one." Finally, without illuminating its rationale, the court held this agreement did not provide benefits "whose provision by nature requires an ongoing administrative program to meet the employer's obligation." Siemon v. AT&T Corp., 117 F.3d 1173, 1178 (10th Cir. 1997).

If you have questions about how to enforce provisions of your executive employment agreement or benefit plan, contact a skilled ERISA lawyer.

Executives in Chicago and the Midwest may be excited to hear about all the General Motors executives suing to recover executive retirement plan benefits from a previously bankrupt employer. Often, when executives have such retirement plans, commonly referred to as SERPs (or "top hats"), the participants can expect to receive little or nothing if the employer becomes insolvent. That is because ERISA § 201(2) top hat plans are exempt from ERISA's funding, vesting, and fiduciary responsibility protections, though are still enforceable as ERISA plans. The General Motors that emerged from bankruptcy assumed much of the pre-bankrupt retirement plan obligations, but the credit agreement with the United States Treasury required that certain obligations, including pension obligations, be reduced.

Like most executives and managers who have such non-qualified deferred compensation or excess benefit plans (ERISA § 3(36)), the GM executives appear to also have been participants in qualified retirement plans at GM, a defined benefit pension plan and a defined contribution stock bonus plan. On Monday, approximately 112 former executives (or their beneficiaries or alternate payees pursuant to a Qualified Domestic Relations Order) sued GM under ERISA § 502(a)(1)(B) claiming a denial of benefits due. The dispute between the executives and GM appears to be over interpretation of a provision in the plan which allows for reducing the SERP benefits by two thirds if benefits exceed $100,000 per year on a single life annuity basis.

The retirees argue that the reduction only applies if he benefits of the SERP exceed $100,000 per year. Meanwhile, GM argues the SERP benefits are reduced when benefits under the qualified retirement plan and the SERP combined exceed $100,000 per year. The language over which the parties dicker states: "for executive retirees who have a combined tax-qualified SRP plus non-qualified benefit under this Plan in excess of $100,000 per annum on a life annuity basis, the amount of benefits under this Plan over the combined $100,000 per annum threshold shall be reduced by 2/3rds." This phrase is certainly open to more than one interpretation, though the question will be whether the administrator's interpretation was reasonable. Also, the use of "combined" just before the second reference to $100,000 appears to present a hurdle to the retirees they did not appear to argue how they clear in any of the internal appeals.

The retirees' interpretation of the plan may very well be the only reasonable interpretation when read in conjunction with other portions of the plan document, in light of amendments to the plan, or pursuant to prior Executive Compensation Committee interpretations of the clause. However, several critical pages of the plan document were omitted from that which was filed, and neither of the other categories of information were attached to the complaint, so we will have to wait to see the outcome! If you have questions about your executive retirement plan, call a lawyer who concentrates in ERISA today.

Many employers in Chicago seek for ways to add incentive to their executives and managers. Some accomplish this through Incentive Stock Options ("ISOs"), or Nonqualified Stock Options ("NSOs") depending on the structure of the options package. Other employers may provide a Supplemental Executive Retirement Plan ("SERP"), also commonly referred to in the benefits community as a "top hat" plan, that vests upon a certain number of years of service and/or attainment of certain goals. Yet other employers seek a more direct investment of the executive or manager's "skin in the game" by either providing a bonus that is equity based compensation, or asking the new executive to directly invest in employer stock. Occasionally, the only source of funds the executive will have liquid for such a purchase of stock will be a retirement account that he or she may rollover into the new employer's plan and then buy the stock with the plan assets.

Ever since the implosion of Enron, and decimation of participants' 401(k) accounts that were invested in Enron stock, many people wonder and ask me what the dangers are to the employee of investing plan assets in employer stock, and what the risks are to the employer of offering the employer stock on the menu of investment options. The answers to those questions could consume enough pages to fill a book, to say the least. Nevertheless, you should be careful about investing your nest egg in employer stock, especially anything more than a small percentage.

Recently, such an executive had been hired by a securities brokerage firm, and its bonuses were typically paid in employer stock. Peabody v. Davis, 2011 U.S. App. LEXIS 7449 (7th Cir. Apr. 12, 2011). In order to receive a bonus payment in cash, rather than in stock, the vice president had to invest funds in the stock. The only funds the VP had were in his IRA, which he rolled over into the employer's ERISA covered defined contribution retirement plan, and then used those plan assets to buy the employer stock. Several years thereafter, as a result of the changes of markets' pricing securities to the penny rather than in eighths of a dollar, commissions at such brokerages tumbled and the employer's stock significantly declined in value.

A question arises whether the fiduciaries of the plan breach their duty of prudence by offering employer stock on the menu of investment options, but generally the choice is presumed to be prudent under Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995). Allowing even a heavy investment in employer stock generally will not violate the fiduciaries' duty to diversify the plan assets in the case of Eligible Individual Account Plans, such as that in Peabody. But where there is a significant decline in the value of the employer stock, there will likely be a decision of questionable prudence by the fiduciaries to continue offering employer stock on the menu of investment alternatives.

If you with equity based compensation, or are investing retirement assets in employer stock, consult an ERISA lawyer.

If you are one of the many people in Chicago fortunate enough to have been provided with a supplemental retirement plan at work, that retirement plan may be worth less than you think. These supplemental plans, called "top hat" plans, are retirement plans typically offered to management or executives in addition to any 401(k) or other plan the employer may have. Top hat plans are limited in to whom the employer can provide them.

The good part is that as an employee-participant in a top hat plan, you can defer more of your compensation than typically allowed by other tax-qualified plans. The trade-off, however, is that such plans do not receive all the typical protections of a retirement plan covered by ERISA (e.g., minimum funding, fiduciary responsibilities, etc.). These plans do not have trusts, are typically payable out of the general funds of the employer, and are subject to claims by the employer's creditors. In a troubled economy, these top hat plans carry significantly more risk than they once did. Some participants in Rand McNally & Company's supplemental retirement plan recently learned this the hard way.

The United States Court of Appeals for the Seventh Circuit upheld a dismissal of a lawsuit brought by participants in Rand McNally's supplemental retirement plan. Rand McNally entered into an asset purchase agreement, selling all its assets to RM Acquisition, LLC--a company created by a private equity firm. Feinberg v. RM Acquisition, LLC, 2011 U.S. App. LEXIS 249, at *2 (7th Cir. Jan. 6, 2011). The asset purchase agreement specifically excluded the top hat plan as one of the liabilities RM Acquisition would assume, leaving plan participants with only an empty shell corporation of Rand McNally from whom to pursue their benefits.

The court held that because RM Acquisition did not assume the liability, and did not consent to succeeding as the plan's administrator, it was not liable for the pension benefits under ERISA. Id. at *3-4. Successor liability might have attached if the acquisition company "connived" with the selling company to deprive participants, or if the successor was a "mere continuation" of the selling company. Id. at *6. The Seventh Circuit held, however, that the participants had not successfully demonstrated either of these situations. If you have a supplemental retirement plan and are in doubt about your employer's financial strength, talk to an experienced ERISA lawyer today.