Jump to content

Is a post-retirement commission plan an ERISA plan?


Recommended Posts

The employer has a plan that provides all sales employees (having worked a specific number of years) will continue to receive commissions on the book of business they created as employees for several years past retirement.  This is an actual plan, not individually designed agreements with the individual sales employees.

Is this an ERISA plan?

It clearly has an ongoing administrative scheme, it provides for a deferral of income past retirement, and provides for retirement income.

Our concern is that the plan is broad-based.  If it were limited to a "top-hat" group, I don't think we have an issue (because we can take some relief from the "top-hat" rules).

This appears to be a pretty common type of plan, but I can't find any guidance on the topic.  Is there some exception I'm not seeing?

Link to comment
Share on other sites

https://www.irs.gov/pub/irs-wd/0813042.pdf

I was interested by your question and found this. It does seem that these are somewhat common and IRS views them as NQDC plans not ERISA pension plans. This IRS memorandum was contesting a FICA and Medicare tax refund, but supports the finding of NQDC (compensation and FICA). I know you have concern about broad-based versus top-hat, but are these people actually "employees"? If I remember, insurance agents are "statutory employees" and so they are treated as employees for some purposes (FICA) and contractors for other purposes (retirement plans?). Contractors can participate in NQDC w/o a top-hat issue is my understanding.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

Link to comment
Share on other sites

In response to CuseFan's post, his statement regarding the characterization of insurance agents is not entirely accurate.

At the outset of this post, I want to emphasize that the insurance company's label that is slapped onto a worker means nothing unless it is backed up by the facts and circumstances of the relationship of the insurance agent vis-a -vis the insurance company.

It depends entirely on how the insurance company treats them for tax purposes as well as whether the facts and circumstances of their relationship with the insurance company justifies the conclusion that they properly fall into one classification or another. Some insurance companies treat insurance agents as common law employees, meaning that they are subject to the direction and control of the insurance company, cannot simultaneously work for other companies in the financial services industry, are reimbursed for certain tools and expenses needed in the performance of their duties, etc. There is a 1987 US Supreme Court case Nationwide Insurance Company v. Darden where the court accepted a 20-factor test proposed by the IRS as the determinant of a worker's true employment status, which was applied to Nationwide Insurance Company insurance agents. Many states and even the federal government have distilled that test down to only a very few facts and circumstances. Some states (such as CA and NJ) use what they refer to as "the ABC test."  If the insurance agent is classified as a common law employee, then there is a concern that the post-retirement payment of renewal commissions could be treated as an NQDC and maybe even an ERISA pension plan.

It is also possible for the insurance company to classify the insurance agent as an independent contractor, provided that their relationship with the company and the facts and circumstances of their relationship justify a finding of such status. In that case, the plan would be an NQDC but it would not be subject to ERISA because it would not cover employees of the company.

There is a third possible employment classification for full-time life insurance agents (note, not property and casualty insurance agents). In order to be a full-time life insurance salesperson, the agent must sell primarily life insurance and annuity products and satisfy certain other criteria in the facts and circumstances surrounding his or her relationship with the insurance company. See Code Section 3121(d)(3)(B). Any agent satisfying this definition is subject to FICA and, as authroized by Code Section 7701(a)(20), is authorized to participate in the insurance company's employee benefit plans as an employee.

 

Link to comment
Share on other sites

You mentioned that "it provides for a deferral of income past retirement". But presumably a commission for 2023 becomes payable only if/when the previously acquired business relationship actually continues into 2023. Doesn't this mean that it was not yet earned as of the prior year in which the salesman retired, so its payment in 2023 is not payment of deferred compensation?

Link to comment
Share on other sites

I looked into support for the notion that the renewal commmission arrangement you described is both NQDC and an ERISA pension plan. Here is a link to an IRS memo issued in 2007 holding that the arrangement was deferred compensation for FICA purposes. https://www.irs.gov/pub/irs-wd/0813042.pdf Please note that the memo does not address the application of Code Section 409A, even though final regulations were issued in 2007. This is because the memo was prompted by the employer's application for a refund of the FICA taxes paid on such amounts, which the IRS denied.

Regarding the issue whether the arrangement is an ERISA pension plan, the case law seems to go in different directions. Please note that the outcome of this issue may well turn upon the actual language of the renewal commission arrangement in question as well as the agent's work or residence location. Also, since I do not have the benefit of an online citation service, it is possible that some of these cases may have been reversed or overruled by decisions in higher courts or subsequently issued case law. Finally, do not overlook the fact that the DOL issues Advisory Opinions from time to time which may have dealt with this particular issue.

That being said, for the proposition that the arrangement is an ERISA pension benefit plan, see Petr v. Nationwide Mutual Insurance Company, 712 F. Supp. 504 (D. Md. 1989) For cases holding that the arrangement does not constitute an ERISA pension plan, see Fraver v. North Carolina Farm Bureau Mutual Ins. Co., 801 F. 2d 675 (4th Cir. 1986), cert. denied, 480 U.S. 919 (1987); Wolcott v. Nationwide Mutual Ins. Co., 664 F. Supp. 1533 (S.D. Ohio 1987). In light of my statements in the foregoing paragraph, please consult with counsel on whether and how the renewal commission arrangement  in question is considered an ERISA pension plan.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...