Disclaimer in Top-Hat Plan Could Save Millions for Employer

Miles & Stockbridge P.C.

Do you have a top-hat plan?  That’s a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees (i.e., those most likely to wear top hats).  A common type of top-hat plan is a supplemental executive retirement plan, or “SERP”.

If you do have a top-hat plan, or are thinking of adopting one, consider the cautionary tale of Bond v. Marriott International, Inc., No. 15-1160 (4th Cir. Jan. 29, 2016).  Bond involved a class action brought by participants in a bonus plan that was operated by Marriott International, Inc. (“Marriott”) from 1970 to 1989.  Bonuses were awarded to management and other key employees in the form of stock issued after retirement, permanent disability, or age 65.  Because bonuses provided retirement income, the plan became subject to the Employee Retirement Income Security Act of 1974 (“ERISA”).Certain provisions of ERISA—including its minimum vesting requirements—do not apply to top-hat plans, however.  Thus, the top-hat status of the bonus plan was hotly contested because bonuses vested on a schedule that would have otherwise violated ERISA.  If the plan failed to qualify as a top-hat plan, participants could be entitled to millions in damages.  To the disappointment of possibly several ERISA attorneys watching this case, however, the top-hat issue was never resolved because the court decided the case on other grounds.

Because no bonuses were awarded after 1989, Marriott argued that the participants’ claims were barred by the statute of limitations.  The applicable limitations period, the parties agreed, was Maryland’s three-year statute of limitations for contract actions.  What the parties disagreed over was when the statute begins to run.  The participants argued that an ERISA cause of action does not accrue until a claim of benefits has been made and formally denied, citing Rodriquez v. MEBA Pension Tr., 872 F.2d 69, 72 (4th Cir. 1989).  This formal-denial trigger is the general rule that applies in most cases.

Marriott argued, however, that certain ERISA cases involve no internal review process and, therefore, no formal denial of a claim.  In these cases, applying the formal-denial trigger would lead to the anomalous result of having the statute of limitations begin to run after a lawsuit is filed.  See Cotter v. E. Conference of Teamsters Ret. Plan, 898 F.2d 424, 429 (4th Cir. 1990).  To avoid this anomalous result, the Bond court adopted the clear-repudiation rule used in other jurisdictions, an alternative left open by the Cotter ruling.

Under the clear-repudiation rule, the statute of limitations begins to run upon a clear repudiation of benefits that is made known to the participant.  See Miller v. Fortis Benefits Ins. Co., 475 F.3d 516, 520-21 (3d Cir. 2007).  In Bond, a clear repudiation of the right to an ERISA-compliant vesting schedule was made known to participants through a disclaimer in a prospectus distributed as early as 1978.

So what’s the disclaimer that could literally end up saving millions of dollars for companies providing top-hat plans? Have a look:

The Incentive Plan is an “employee pension benefit plan” within the meaning of [ERISA or the Act]. However, inasmuch as the [Incentive] 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, it is deemed a “select plan” and thus is exempt from the participation and vesting, funding and fiduciary responsibility provisions of Parts 2, 3, and 4 respectively of Subtitle B of Title 1 of the Act. The reporting and disclosure provisions of Part 1 of Subtitle B of the Act continue to apply and under Section 2520.104-23 of the regulations, the Company has filed a statement with the Department of Labor providing certain information with respect to the Incentive Plan. The Company will not extend to participants any of the protective provision of the Act for which an exemption may properly be claimed.

Bond reinforces the lesson that carefully designed plans and thoughtfully drafted participant communications may prevent or minimize expensive litigation.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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