3561 / What ERISA requirements are imposed on deferred compensation employee benefit pension plans?

Certain pension type plans, including “top hat” plans for an unfunded “select group,” of management or “excess benefit plans” ( Q 3608), and plans that provide payments to a retired partner or a deceased partner’s successor in interest under IRC Section 736, are exempt from some or all of these more onerous ERISA requirements.² For exempt plans, there is currently only a one-time short-form filing report at the inception of an ERISA-exempt plan, no funding or vesting requirements, and only a written plan document (which is necessary for purposes of Section 409A anyway) and a claims procedure (recently revised as to disability claims) as nominal partial fiduciary responsibility. As of January 1, 2017, the one-time filing must now be made online at the DOL website. For comparison, “employee welfare benefit plans,” like split dollar insurance plans, also have certain available ERISA exemptions that parallel those for ERISA pension benefit plans, but they are not the same. Section 162 bonus life insurance programs, when properly designed and operated, are not ERISA “employee benefit plans,” pension or welfare, at all and would be expected to escape all ERISA requirements.³

In a 2017 case involving a nonqualified deferred compensation plan, a U.S. Appellate Court has affirmed a lower district court holding that a company can change its phantom crediting rates on employee deferrals into the plan prospectively without violating its fiduciary duties under ERISA. The court said in a de novo review that the changes appeared proper on the facts and were an expected normal exercise of the plan’s authority and judgment of discretion concerning crediting exercises crediting indices, and were uniformly applied to all plan participant. In effect, the court said that participants have no contractual right to a specific expectation of specific crediting indices over the life of a plan.⁴

In a 2018 case involving a nonqualified deferred compensation plan, another U.S. Appellate Court held a plan participant had no standing to make a claim against the plan sponsor for violating its fiduciary duty or engaging in a prohibited transaction in order to recover benefits or obtain a declaratory judgment against the plan sponsor as to the participant’s qualified as well as nonqualified plans. In this case, the Siemen’s Corporation transferred the employee participant’s specific nonqualified deferred compensation plan benefit liabilities as a part of a sale of a division of the sponsor’s business Sivantos, Inc., the buying company. The buying company agreed to assume all the plan liabilities, including those of the participant, as part of the purchase. The participant was upset because the buying company was much smaller and financially less significant than Siemens. The Appellate Court affirmed the district court dismissal of the case for slightly different reasons saying the plaintiff’s claim did not shown an “injury in fact’ of an invasion of a legally protected interest” that is “concrete and particularized” and there is a casual relationship between the injury and the conduct complained of” and a “likelihood” that the injury will be redressed by a favorable decision. The Appellate court said the claims were too speculative in the absence of a real showing of actual loss, or failure to pay or some similar injury, even though the participant alleged that the informal COLI funding behind the plan in a Rabbi Trust was eliminated thereby reducing the security of the participant’s benefits.⁵

In considering this decision, it should be noted that nonqualified deferred compensation plans are not mandated and cannot escrow or trustee assets for a plan without causing current income taxation to plan participants. Moreover, plan sponsors are not even required to informally create a general asset reserve (as in this case of COLI in Rabbi Trust) to help support a plans liabilities, unless the plan requires it, which it apparently did not. Hence there was fiduciary duty violated in the plan sponsor’s actions under the facts.