Many bonus plans, including nonqualified deferred compensation plans (NQDC), are subject to ERISA rules and regulations. Even for plans that are not subject to ERISA, including ERISA-compliant procedures can be a benefit, as courts will see this as a good-faith attempt to provide the best claims procedures, dispute resolution procedures, and other best practices to plan participants. A recent case from the Sixth Circuit held that the ERISA rules and regulations preempt state contract and state tort laws, which highlights the benefits of applying ERISA to deferred compensation plans, in particular.
Wilson v. Safelite Grp., Inc.
The case focused on whether a certain NQDC plan was subject to ERISA and IRS Code Section 409A. In particular, the case regarded one of the limits of a Code Section 409A “savings” clause and the importance of following ERISA claims procedures.
IRS Code Section 409A “Savings Clause”
NQDC plans are required to contain a “savings clause” that states the plan is intended to comply with IRS Code Section 409A. This section of the IRS Code imposes penalties on participants in the plan if the documents or administration fails to comply with certain payment and election rules. The purpose of the clause is to ensure that ambiguity in the plan documents is resolved in favor of a pro-Code Section 409A interpretation, though it is not necessarily effective since the terms of the document must still substantially comply with Section 409A. While the clause will save a plan with a small ambiguity, it will not save a plan that is missing certain sections or important language. Penalties for failure to comply generally fall on plan participants. However, IRS reporting penalties may apply to an employer who fails to properly report a Code Section 409A failure.
In the case at hand, Mr. Wilson had accumulated a significant balance in Safelite’s NQDC plan. After he left Safelite, the IRS audited the plan and found that his elections violated IRS Code Section 409A. As a result, Mr. Wilson sued Safelite under state contract and tort laws, breach of contract and mismanagement.
ERISA Claims Procedure
The district court hearing the case found that the NQDC plan at issue was an ERISA pension plan and thus, ERISA preempted state laws, a decision that was affirmed on appeal. More specifically, a NQDC plan that paid on retirement by default, but allowed earlier payments, was an ERISA pension plan, even though the payments could be made before retirement.
Regardless of whether a plan falls under ERISA, having ERISA-compliant procedures in a plan means that, in a situation like this where the plan is found to be governed under ERISA, it would not be subject to further penalties. A “top-hat” plan, while exempt from many ERISA requirements, is still subject to ERISA claims procedures. Having ERISA claims procedures in place would have provided a chance to resolve Mr. Wilson’s issue ahead of taking the case before the court system.
Helping clients put into their documents and procedures best practices is one role of the experienced, responsive benefits attorneys at Hall Benefits Law. To learn more about the services we offer, reach out to our team by calling 678-439-6236 or visiting the Hall Benefits Law website.
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