Executives in Chicago and the Midwest, especially working for small to mid-size employers, often negotiate into their employment agreements some form of deferred compensation and/or severance compensation. Until the relationship between executive and employer sours, the parties only think about the tax considerations of executive compensation. But when there is a dispute between employer and executive, and the executive must take measures to enforce the agreement, the question becomes whether the compensation is covered by ERISA or not. Results are mixed, and always turn on a fact specific inquiry. Consequently, there are no hard and fast rules.
One such executive recently filed a complaint in state court and faced a motion to remove to Federal court under ERISA by his former employer. See Hoffner v. Bank of Choice Holding Co., No. 11-266 (D. Colo. June 21, 2011). In that case, the bank entered into an “Executive Salary Continuation Agreement” with Mr. Hoffner, whereby the bank would pay Hoffner $50,000 for ten years upon retirement and reaching age 65. But if Hoffner voluntarily terminated his employment prior to reaching age 65, he would receive the balance of an accrued liability account–an unfunded account maintained on the bank’s books recording a liability to pay Hoffner’s post-retirement compensation. But nothing in the record suggested how the bank accrued the liability, whether on a straight line method or otherwise. The agreement only provided that the bank would place “appropriate reserves” in the accrued liability account.
The court ultimately held the parties’ deferred compensation agreement did not meet the definition of an ERISA-governed plan. The court applied the element test of the seminal case, Donovan v. Dillingham, 688 F.2d 1367 (11th Cir. 1982). The court held the intended benefits were not reasonably ascertainable, there was not a reasonably ascertainable class of beneficiaries, and there was not a sufficient ongoing administrative scheme (see Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987)). The court rejected the bank’s argument that only the kind of benefits should be reasonably ascertainable, rather than the amount. Also, nothing suggested these benefits were provided to a class of beneficiaries–they were only provided to this one employee. Note, however, that other courts have held there could be a “class of one.” Finally, without illuminating its rationale, the court held this agreement did not provide benefits “whose provision by nature requires an ongoing administrative program to meet the employer’s obligation.” Siemon v. AT&T Corp., 117 F.3d 1173, 1178 (10th Cir. 1997).