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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
Stock-based payments are considered bonuses and should not be considered compensation for purposes of calculating benefits in a top-hat plan, the U.S. Court of Appeals in Chicago (CA-7) has ruled in Comrie v. IPSCO, Inc.. The court rejected an executive's claims urging that plan language that conferred interpretive discretion on an administrative committee should be disregarded because the committee had a conflict of interest and that a top-hat plan administrator is not a fiduciary under ERISA. According to the appellate court, the administrators of the top-hat plan did not act arbitrarily or capriciously.
Background
A company established an unfunded supplemental executive retirement plan, a top-hat plan, for its top executives. Under the terms of the plan, any executive whose employment is involuntarily terminated within two years of a change in control is eligible for benefits without regard to an otherwise applicable cap. The top-hat plan also defines "involuntary termination" as any material change in the executive's "position, reporting relationship, overall responsibilities, or authority." Later, a Swedish firm acquired a controlling interest in the company and promoted another person ahead of the executive, the corporation's principal lawyer, who then resigned and asked for his plan benefits to be paid in a lump sum. The company accepted his claim that he had been involuntarily terminated but disputed his proposed calculation of benefits. Under the terms of the plan, benefits under the plan are based on the number of years the executive has worked at the company times 2% of the executive's average compensation in the five years before departure. The source of the parties' dispute is a plan provision that a bonus is not included in compensation.
According to the district court, the plan conferred interpretive discretion on the administrative committee, whose decision must stand unless it was arbitrary and capricious. After considering the plan language, as well as the company's 401(k) plan and its summary plan description and the minutes at the board meeting at which the plan was adopted, the district court concluded that the committee's decision was reasonable and it entered summary judgment in favor of the company.
Administrative discretion upheld
The executive asked the appellate court to disregard the plan language expressly conferring interpretive discretion on the administrative committee, claiming that the committee had a conflict of interest and that the top-hat plan administrator is not a fiduciary under ERISA. The court rejected these arguments, noting that, under Firestone Tire & Rubber Co v. Bruch, a contract conferring interpretive discretion must be respected even when the decision is to be made by an ERISA fiduciary and that it is easier, not harder, to honor discretion-conferring clauses in contracts that govern the actions of nonfiduciaries. According to the court, the plan administrators did not act arbitrarily or capriciously in concluding that the stock-linked compensation is a form of bonus. The executive admitted that, though he was entitled to some options each year, the number of options he received each year was discretionary, a fact that court believed made the stock-linked income look like a bonus, as the plan concluded. The court also rejected a claim that the SPD of the company's 401(k) plan defined bonuses and incentive pay separately, pointing out that the broad scope of one plan does not help in trying to decide the scope of exclusions from a different plan.
Though both sides provided extensive evidentiary analysis of plan terms and IRS regulations defining compensation, the court suggested that none of these directly answered the question as to the meaning of the word "bonus" in this top-hat plan. As the court noted, it is enough to decide whether the plan's administrators acted arbitrarily or capriciously, which the court concluded they did not. The appellate court upheld the district court's decision in favor of the company.
For more information, visit http://www.wolterskluwerlb.com/rbcs.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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