Many incentive or bonus plans make payments or deliver stocks within two and a half months after the end of the year in which a participant becomes vested in order to comply with the short-term deferral exception of Code Section 409A.

However, some incentive plans provide for accumulations, multi-year periods and mandatory deferrals. These plans may unwittingly become subject to ERISA’s requirements.

Take the recent federal court decision in Miller v. Olsen, 62 EBC 1845 (D. Or. 2016).

In Miller v. Olsen, the company had established an incentive plan known as the Equity Growth Plan. The federal courts have uniformly held that equity-based compensation plans are not subject to ERISA’s vesting and other requirements. Additionally, ERISA contains a separate exception for “bonus” plans:

§ 2510.3-2(c) Bonus Program. For purposes of title I of the Act and this chapter, the terms “employee pension benefit plan” and “pension plan” shall not include payments made by an employer to some or all of its employees as bonuses for work performed, unless such payments are systematically deferred to the termination of covered employment or beyond, or so as to provide retirement income to employees.

But under the company’s Equity Growth Plan, future payouts were to be made in cash, based on the appreciation in the value of a single property owned and managed by the company.

[Image credit: Bloomberg]
[Image credit: Bloomberg]

In the case, the court found that the Equity Growth Plan was not subject to ERISA because (1) its express terms do not contemplate a method of funding; (2) its express terms do not contemplate an ongoing administrative scheme; and (3) its primary purpose is not to provide deferred compensation. Good for them. But in other cases, with different facts, federal courts have ruled differently.

What to look out for
Incentive plan arrangements that are in danger of being classified as ERISA plans often provide for payments that are accumulated rather than distributed and/or systematically deferred to the termination of covered employment or beyond. Employers should look out for a plan feature that expressly puts conditions on payment upon termination of employment or retirement.

Other relevant circumstances for determining whether an arrangement is an incentive or bonus plan — or compensation deferral program — include:

  1. Whether the arrangement's design results in a high percentage of bonus recipients to be at or nearly at retirement age;
  2. Whether the arrangement allows for payments of unvested amounts upon termination;
  3. Whether the plan is communicated to employees as an arrangement intended to provide retirement or deferred income;
  4. The length of the payout period; and
  5. Whether the bonus payments, by operation of the plan, are made to another type of retirement account such as an IRA.

Bonus plans may seem simple but they have a complexity and a set of requirements that warrant your attention.


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