Non-qualified Plan Litigation 

(Deferred Compensation, SERPs, and Top Hat Plans)

     >>> Checklist: Contractual Precautions against Benefit Plan Litigation​
2019.12.14  Executive Plan Liability for Who Participates.  Employers generally have broad discretion when selecting who participates, and how much they receive, in stock award plans, supplemental retirement plans (aka SERPs), and other non-qualified plans.  There are limits, however, as illustrated by this New York decision holding a nonprofit organization liable to its CFO for denying executive retirement plan benefits. The case, Wegmann v. Young Adult Institute, turned on enforcing plan terms that bound the employer, with the court holding: "Under the plain terms of the SERP, Plaintiff became a vested member of the SERP on July 1, 2006. And it is equally clear under the SERP that no amendment after July 1, 2006, could have the effect of divesting Plaintiff's interest in the SERP." Aside from being bound by the terms of the plans they write, employers also need to be careful to avoid discriminating - either by intent or impact - against those protected by Title VII or age discrimination laws.

2016.08.26  SERP Claim Allowed under ERISA for Misrepresentation.  A former bank CEO may proceed with claims under ERISA for equitable relief aimed at reforming his release of SERP claims because, as found by a California district court in Buster v. Mechanics Bank --

  • ​"on the present record, we have a strong showing that Mechanics Bank cheated Buster out of his SERP benefits by telling him the release would not affect his pension yet, once the ink was dry, the bank reversed field and insisted that the release had done just that."
  • "This order holds that 'appropriate equitable relief' under ERISA Section 502(a)(3) may extend to remedy inequitable conduct pertaining to a supposed waiver of plan rights."

2016.01.29  Stock Plan Claims for ERISA Vesting - Time Barred.  In Bond v. Marriott, a  4th Circuit panel unanimously held that the ERISA claims of former employees are barred by the statute of limitations. The court held that ERISA's “formal denial” rule should not be applied in cases that do not involve an internal review process and a formal claim denial.  Rather, the court emphasized that the operative question is whether the fiduciary has “clearly repudiated” the beneficiary’s entitlement to benefits. Applying that rule, the panel held that the plan prospectus adequately signaled such clear repudiation because it informed participants that the plan was a “top hat” plan exempt from ERISA’s vesting requirements. The court found it dispositive that --

  • “Marriott informed the appellants in 1978 that the plan was exempt from ERISA’s vesting requirements.  The appellants then waited more than 30 years to file suit, alleging that the plan violates ERISA’s vesting requirements.”

2015.09.23  Lost Tax Benefits Held Not Recoverable on Plan Termination. In Taylor vs NCR, a N.D. Georgia court cited extensive precedent to support its conclusion that "The Plan expressly grants the Committee the right to amend or modify the Plan, and Taylor cannot maintain a claim under Section 502(a)(1)(B) for the "adverse effect" of tax consequences. Taylor fails to allege that the application of a present value reduction factor or any other assumption resulted in a lump sum payment that was actuarially less than his accrued benefit under the Plan. "

2015.01.06  Nonqualified Plans and Late FICA Withholding – Retirees Win Round 1 of Class Action.  On January 6th, a Michigan district court granted summary judgment to retirees who paid increased FICA taxes on their deferred compensation and SERP benefits because of Henkel Corp.’s failure to withhold FICA when the payments were earned (rather than later when they were paid). Employers should take note because the court granted class action status -- and found for the retiree class – for three main reasons that are worth self-inspection. First, Henkel’s initial letter to retirees informed them that FICA taxes had “not been properly withheld.”  That was a costly admission, especially because the employer later sought to argue that the tax laws permit alternative methods for FICA compliance, and they had merely pursued one that was allowable but less favorable to retirees.  Worse for Henkel, the tax provision within its plan expressly required tax withholding in the year in which deferrals occurred.  Those reasons complemented the district court’s third finding: namely, that the purpose of the underlying  plan was tax deferral, and that Henkel controlled the time of FICA withholding and should have administered the plan in a manner favorable to plan participants.

  • Whether or not the Henkel Corp. decision survives if appealed, those who administer supplemental retirement, deferred compensation, and other nonqualified plans should examine how they are handling FICA withholding – and how their plans could be revised to defuse litigation risks. If stumbles are found, thoughtful remediation is key. Finally, recent ERISA litigation favorable to plan employers and administrators warrants consideration of controls through plan amendments adding internal statutes of limitations for claims, and forum designation provisions.  Amendments of this kind may streamline administration and reduce litigation risks not only for nonqualified plans, but also for 401(k), pension, and welfare plans.
  • Backstory: Previously, in a decision dated 12/12/2013 in Davidson v. Henkel Corp, the E.D.MI court refused to dismiss the underlying ERISA claims, which on the following ground: "Defendants may be liable under this theory [i.e., breach of ERISA fiduciary duty] because the Plan gave them discretionary control over participants’ funds and their tax treatment and the Plan authorized and obligated Defendants to properly manage the tax withholding from Plaintiff’s benefits, which they purportedly admitted to mishandling."

2011.12.16  ERISA Claims Procedures Violated in "Good Reason" Severance Denial re "Top Hat" Plan.  In a comprehensive decision, a Massachusetts District Court orders "that the case be remanded to the plan administrator because of significant procedural flaws that rendered the decision to deny Plaintiff benefits under the top-hat plan unreasonable." McCarthy v. Commerce Group, D. MA, 12/16/2011, holding at page 49 of the PDF that --

  • Based on the regulations and caselaw, this Court concludes that top hat plans are subject to the full and fair review with one caveat - the full and fair review need not be undertaken by a "fiduciary" as there is no fiduciary relationship between administrator and beneficiary in top hat plans. Indeed, the "full and fair review" provision of ERISA is "itself a component of good-faith plan administration." Goldstein, 251 F.3d at 447 n.9. See "Standard of Review" below.

2011.06.06  ERISA Preempts and Forecloses Relief for Former Executives Seeking SERP Benefits.  An Eastern District of Michigan decision exhaustively analyses applicable judicial precedent relating to the claims of former executives for supplemental retirement benefits, and holds that (i) their breach of fiduciary duty claims are completely preempted by ERISA but outside its civil enforcement provisions, and (ii) their other state law claims involve alternative state law enforcement mechanisms that must be dismissed as being preempted by ERISA. Loffredo v. Daimler, 2011.June.6 (E.D.MI), stating that --

  • "Courts in several circuits, including the Sixth Circuit, have determined that top-hat plan fiduciaries and administrators cannot be subject to state law breadth of fiduciary duty claims because ..." (Page 13 of decision.)
  • "ERISA preempts state laws that (1) mandate employee benefit structures or their administration, (2) provide alternative enforcement mechanisms, or (3) bind employers or plan administrators to particular choices or preclude uniform administrative practice, thereby functioning as a regulation of an ERISA plan itself." Quoting from Penny/Ohlmann/Neiman v. Miami Valley Pension Corp. 399 F.3d 692, 698 (6th Cir., 2005). (Page 13 of decision.)
  • "As discussed above, all of the Plaintiff's claims seek to recover SRP benefits and/or enforce the terms of the SERP and necessarily depend on the existence of the plan, and therefore their causes of action [under state law] seek to provide an alternative mechanism of enforcement of the SRP." (Page 17 of the decision.)
  • "Claims for benefits due under an ERISA plan, §1132(a)(1)(B), are governed by the federal common law of contracts." (Page 21 of decision.)

Limitations Periods for Claims

2016.01.29  NQDC Claims Period Three Years from Employer's Notice of Plan Vesting Terms.   In Bond v. Marriott, the 4th Circuit first held that Maryland's three year statute of limitations applied to the benefit collection claim asserted by a participant in Marriott's non-qualified plan.  The court then wrestled with when that period began, because the participant never made a claim under the plan.

       In the absence of a formal claim and denial, the court applied an "alternative approach of determining the time at which some event other than a denial of a claim should have alerted [the plaintiff] to his entitlement to the benefits he did not receive" - citing  Cotter v. E. Conference of Teamsters Ret. Plan, 898 F.2d 424, 429 (4th Cir. 1990). The 4th Circuit then held in favor of Marriott, for the reasons quoted here from the court's opinion:

  • Applying this rule here, we conclude that the Appellants' claims are untimely. To begin, the 1978 Prospectus—in a section entitled "ERISA"—plainly stated that the Retirement Awards did not need to comply with ERISA's vesting requirements. The Prospectus explained that "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," the Plan was a top hat plan "exempt from the participation and vesting, funding and fiduciary responsibility provisions" of ERISA. (J.A. 298). This language clearly informed plan participants that the Retirement Awards were not subject to ERISA's vesting requirements, the very claim made by the Appellants here. This language was included in prospectuses distributed in 1980, 1986, and 1991.
  • Marriott informed the Appellants in 1978 that the Plan was exempt from ERISA's vesting requirements. The Appellants then waited more than 30 years to file suit, alleging that the Plan violates ERISA's vesting requirements.   . . .   Here, Marriott clearly repudiated any right the Appellants had to the vesting requirements of ERISA in 1978.

2012.Sept.17  ERISA Severance and DE Law: Limitations Period Thwarts Claims by Former Martha Stewart GC 
Employers should take note of Barton v. Martha Stewart, in which a S.D.N.Y. court dismissed a former General Counsel's severance claim because it was untimely due to a one-year statute of limitations applicable under Delaware law (which the plan designated as controlling, and which NY law enforced because of the employer's incorporation there). More at Executive Severance Litigation.

Federal Common Law controls re ERISA Plan Benefits -- see Aramony v. United Way Replacement Benefit Plan, 191 F.3d 140, 147, 149-150 (2d Cir. 1999; In re New Valley Corp., 89 F.3d 143, 149 (3d Cir. 1996).

Forfeiture of Deferred Compensation

2010.Aug.30  CA Court Enforces Forfeiture Despite Wage Law. Claims under California's wage protection law were dismissed because incentive compensation does not constitute "wages" unless “all conditions agreed to in advance for earning those wages have been satisfied,” forfeiture of unvested awards was proper where employment terminated before vesting of the awards pursuant to the terms of Merrill Lynch’s Wealthbuilder Plan."  Also dismissed, for the same reason, were claims that the forfeitures violated California’s Unfair Competition Law §§17200 and 16600, but note the court’s dicta that “courts have found violations of Section 16600 when employees forfeit some benefit if they later work for a competitor.”  Callan v. Merrill Lynch (S.D. CA). 

Standard of Review

2012.Sept.09  Second Circuit's Top Hat Decision Leaves Open Question re Deference.  A well-designed severance plan has the potential to defeat claims, and that occurred in AIG v. Guterman. The case involved an executive who refused a lesser position, and then contested AIG's denial of severance benefits because they were payable for involuntary terminations, not resignations. As the decision notes, "the Plan expressly precludes departing employees from asserting constructive discharge in support of a severance denial claim." The Second Circuit dismissed the executive's claim, but expressly declined to address whether to review the benefits denial under a de novo standard or under the arbitrary and capricious standard set forth in the plan.

Guterman maintains, however, that with respect to top hat plans – particularly those administered by entities within the corporate structure, which in some respect operate under an inherent conflict of interest – we should apply a less deferential standard of review, even when the plan expressly vests the administrator with discretion to interpret its terms. This is a matter of some debate in the circuit courts of appeal. Compare Goldstein v. Johnson & Johnson, 251 F.3d 433, 441-44 (3d Cir. 2001) (holding Firestone Tire analysis inapplicable to top hat plans), with Comrie v. IPSCO, Inc., 636 F.3d 839, 842 (7th Cir. 2011) (applying Firestone Tire and rejecting Goldstein’s analysis). We have not previously addressed this question head-on. See Paneccasio v. Unisource Worldwide, Inc., 532 F.3d 101, 108-09 (2d Cir. 2008) (applying arbitrary and capricious review to administrator’s determination to terminate top hat plan without examining whether a different standard of review might apply). We do not reach this question here, however, because, even making a de novo determination on the administrative record, we reach the same conclusion as did the Administrator.

2011.Feb.18  7th Circuit applies Firestone Deference to Top Hat Plans. See Comrie v IPSCO, 636 F.3d 839 (2011), in which the court reasons as follows:
As for the fact that the administrator of a top-hat plan is not an ERISA fiduciary: One circuit has held that interpretations by a non-fiduciary must be ignored, and that courts must make independent decisions, no matter what a plan's governing documents say. Goldstein v. Johnson & Johnson, 251 F.3d 433, 442-43 (3d Cir. 2001). Another has adopted an intermediate standard divorced from contractual language. Craig v. Pillsbury Non-Qualified Pension Plan, 458 F.3d 748, 752 (8th Cir.2006). We don't get it. When the Supreme Court held in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989), that judges presumptively make independent decisions (often, though misleadingly, called "de novo review", see Krolnik v. Prudential Insurance Co., 570 F.3d 841, 843 (7th Cir.2009)), about claims to benefits under ERISA, it derived this conclusion from an analogy to trust law. The Court understood trust law to call for a non-deferential judicial role. ERISA fiduciaries are like common-law trustees, the Justices thought, so judges normally should make independent decisions in ERISA litigation. In Firestone's framework, deferential review is exceptional, authorized only when the contracts that establish the pension or welfare plan confer interpretive discretion in no uncertain terms. 489 U.S. at 111, 109 S.Ct. 948. See also, e.g., Diaz v. Prudential Insurance Co., 424 F.3d 635 (7th Cir.2005).

Under Firestone, fiduciary status leads to independent judicial decisions, unless the contract specifies otherwise. To hold, as Goldstein does, that non-fiduciary status requiresindependent judicial decisions, despite a contract, is to turn Firestone on its head. Firestonetells us that a contract conferring interpretive discretion must be respected, even when the decision is to be made by an ERISA fiduciary. It is easier, not harder as Goldstein thought, to honor discretion-conferring clauses in contracts that govern the actions of non-fiduciaries.