'ERISA and NQDC'

• Author: Marla J. Aspinwall - Michael G. Goldstein
• Pages: 189-213

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CHAPTER VI

ERISA AND NQDC

I. INTRODUCTION

The Employee Retirement Income Security Act (“ERISA”)1 became law on Labor Day,

1974 and was enacted to make pension promises real.2 Before ERISA, the “pension promise”

could be described as follows:

If you remain in good health and stay with the same company until you are

65 years old, and if the company is still in business, and if your

department has not been abolished, and if you haven’t been laid off for too

long a period, and if there is enough money in the fund, and if that money

has been prudently managed, then you get a pension.3

Many ERISA provisions are designed to provide security that the employee will receive

the pension promised: the employer is required to fund its obligations so that the money will be

available to pay the benefits; the funds must be held in a separate trust and the employee cannot

assign or otherwise transfer the right to receive the retirement benefits; an employee’s benefits

must vest within certain time periods; and the employer and others dealing with plan assets or

otherwise exercising discretion are held to fiduciary standards. Thus, ERISA is a comprehensive

scheme designed to ensure that, in most cases, employers will deliver on their promises to

provide pensions to employees.

A.

Scope of ERISA. ERISA applies to pension plans and welfare benefit plans4

sponsored by employers for employees. Thus, ERISA does not apply to NQDC plans to the

extent that they cover non-employee directors or independent contractors. However, even if a

plan is a pension plan or a welfare benefit plan, it still may be completely exempt from ERISA or

it may be exempt from the more burdensome requirements of ERISA. ERISA was designed to

protect employees who do not have the negotiating power in the employment relationship to

protect themselves.5 However, ERISA includes exemptions for plans that are limited to top paid

management because such employees are thought to have enough pull in the organization to not

need as much legal protection. As a result, most NQDC plans are structured to be exempt, at

least from the more onerous provision of ERISA. Therefore, this Chapter will discuss the

requirements for a NQDC plan to be exempt from some or all of ERISA.

1 So me have as serted t hat ER ISA s tands for “Every Rid iculo us Idea S ince Ad am.” See Richardson,

Commissioner Richardson Urges Creative Response to Pension Problems, 66 Tax Notes 851 (Feb. 6, 1995).

2 Blau v. Del Monte Corp., 748 F.2d 1348, 1352 (9th Cir. 1984); Irish, 20 Years Back And 40 Years

Forward: A L ook At Retirement Income Policy, 67 Tax Notes 528 (Apr. 24, 1995).

3 Id.

4 ERISA § 3(3), 29 U.S.C. § 1002(3).

5 DOL Advisory Opinion 90-14A (May 8, 1990).

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B.

Definition of Plan. Although it is a key concept, ERISA does not provide a

helpful definition of the word “plan.”6 One court has indicated that a “plan” exists if four

conditions are met: “the existence of intended benefits, intended beneficiaries, a source of

financing, and a procedure to apply for and collect benefits.”7 The courts have stated that a plan

may exist even if there is no formal writing.8 Since a written plan is not required, the

establishment or existence of a plan can be shown by acts or events that indicate the existence of

a plan.9 In light of this broad definition, an employer may offer a benefit to one or more

employees and not realize that it must comply with various ERISA requirements. For example,

an employer may sign an employment contract or a bonus agreement deferring the payment of

compensation that may subject the employer to various ERISA requirements.

C.

Types of Plans. ERISA applies to “employee welfare benefit plans” and

“employee pension benefit plans.”10 An “employee welfare benefit plan” provides participants

with one or more of the following benefits: “medical, surgical, or hospital care or benefits, or

benefits in the event of sickness, accident, disability, death or unemployment. . . .”11 Welfare

benefit plans are not subject to the ERISA rules on vesting, participation or funding, but

generally are subject to the reporting, disclosure, and fiduciary duty requirements.12 An

“employee pension benefit plan” is defined, in part, as follows:

[A]ny plan, fund, or program...established or maintained by an

employer or by an employee organization...to the extent that by its

express terms or as a result of surrounding circumstances such

plan, fund, or program —

(i) provides retirement income to employees, or

(ii) results in a deferral of income by employees for periods

extending to the termination of covered employment or

beyond. . . .13

Clearly, many non-qualified deferred compensation (“NQDC”) arrangements will fall

within this broad definition of “employee pension benefit plan” because NQDC arrangements

will be designed to provide retirement income to the employee or to defer income at least until

6 See ERISA § 3(3), 29 U.S.C. § 1002(3) (defining “plan” as an employee welfare benefit plan or an

employee pension benefit plan).

7 Donovan v. Dillingham, 688 F.2d 1367, 1372 (11th Cir. 1982) (to be subject to ERISA, the plan must

cover p artici pants because of t heir em ploy ee stat us, offer o ne or mo re of the b enefit s descri bed in

ERISA, and the plan must be established or maintained by an employer or employee association).

8 Id.

9 Id. at 1373. Note that NQDC plans su bject to IRC § 409A are now required to be in writing to avoid tax

penalties as discussed in Chapter III, “Income Tax C onsequences of NQDC for the Empl oyee.”

10 ERISA § 3(1), (2), 29 U.S.C. § 1002(1),(2).

11 ERISA § 3(1), 29 U.S.C. § 1002(1).

12 ERISA §§ 201(a)(1) (participation and vesting), 301(a)(1) (funding); see Blau, 748 F.2d at 1352.

13 ERISA § 3(2)(A), 29 U.S.C. § 1002(2)(A) (emphasis added).