DOL and Court Rulings

Under what conditions might a phantom stock plan be considered a bonus plan instead of a nonqualified deferred compensation plan?

The Department of Labor (“DOL”) establishes the regulations which define whether or not a program is a pension (and thereby subject to ERISA). According to the DOL, a plan is a pension to the extent that, by (i) its express terms, or (ii) as a result of “surrounding circumstances,” it:

  1. provides retirement income to employees, or 
  2. results in a deferral of income by employees for periods extending to the termination of covered employment or beyond.

The actual determination of whether a plan is subject to ERISA comes down to a weighing of facts and circumstances. Specifically, the DOL and Federal courts have come to the following conclusions:

  • A plan that provides a benefit for participants at age 62 or older (the presumed retirement age) is not necessarily a NQDC plan.
  • A plan may be considered a pension regardless of the method of calculating contributions made to the plan, the method of calculating benefits under the plan, or the method of distributing benefits from the plan.
  • A plan under which income to an employee was deferred for three years was not an employee pension benefit plan because the plan did not condition distribution of the amount deferred on termination of employment, retirement, or any other circumstance other than the passage of a fixed period of time.
  • The Fourth Circuit found that a plan under which an insurance agent's renewal fees over the prior twelve months were paid as a bonus on the agent's disability, retirement or termination, was not a pension plan. Although the plan was one of two components of a single plan, and the other component was considered a pension plan, the two components had distinct purposes, employed distinct terms, and imposed distinct obligations. Therefore, they could be analyzed separately.
  • On the other hand, a plan under which insurance agents accrued benefits for a lifetime after an initial five-year period, was a pension plan defined by ERISA. Thus, where agents accrued nearly $95,000 over a ten-year period under the arrangement, the money represented retirement income subject to the protections of ERISA.
  • An employee stock purchase plan designed to qualify under Code Sec. 423 was not expressly an employee pension benefit plan, since it didn't provide retirement income or result in a deferral of compensation to termination of employment or beyond. However, the plan could later have been regarded as a pension plan, as a result of surrounding circumstances:
    • if it were administered in a way that had the effect of providing retirement income to employees,
    • if it resulted in a deferral of income by employees extending to termination of covered employment or beyond, or
    • if communications to plan participants suggested that the plan was established or maintained for either or both of these purposes.