Are 457(f) plans subject to ERISA?

[Guest Bearlee]

There is a deferred comp. agreement with a certain individual and one paragraph states that this is merely a contract and not subject to ERISA.

Any citations to authority would be very helpful. Thank you.

[Peter Gulia]

There is an argument that an agreement might be so simple and so lacking a need for “administration” that it might not be a “plan” within the meaning of ERISA’s use of that word.

Some court opinions support the idea that an agreement with only one person can be a plan. These include:

• Cvelvar v. CBI Illinois, Inc., 106 F.3d 1368 (7th Cir. 1997), cert. denied, 522 U.S. 812 (1997).
  
• Williams v. Wright, 927 F.2d 1540, 13 Employee Benefits Cases (BNA) 2137 (11th Cir. 1991).
  
• Healy v. Rich Products Corp., 13 Employee Benefits Cases (BNA) 2083 (W.D.N.Y. 1991).
  

Some court decisions that support a no-plan view include:

• Fraver v. North Carolina Farm Bureau Mutual Insurance Co., 801 F.2d 675 (4th Cir. 1986), cert. denied, 480 U.S. 919 (1987).
  
• Darden v. Nationwide Mutual Insurance Co., 922 F.2d 203 (4th Cir.), cert. denied on this issue, 112 S. Ct. 295 (1991), reversed and remanded on other grounds, 112 S. Ct. 1344 (1992)
  
• Lackey v. Whitehall Co., 704 F. Supp. 201 (D. Kan. 1988), amended by 1989 U.S. Dist. LEXIS 2344 (D. Kan. Feb. 23, 1989).
  
• McQueen v. Salida Coca-Cola Bottling Company, 652 F. Supp. 1471 (D. Colo. 1987).
  
• Jervis v. Eldering, 504 F. Supp. 606 (C.D. Cal. 1980).
  

Of course, you’ll want to Shepard’s®-ize these citations and extend your research.

Although an employer’s agreement with only one person might be a helpful fact, the courts’ reasoning has considered the simplicity or complexity of the agreement’s terms.

Also, something that otherwise might be a plan isn’t unless it’s a pension plan or a welfare plan.

An agreement under which the executive becomes entitled to the deferred wage without retirement or severance from employment might be argued as not a pension plan. That the executive becomes entitled to the deferred wage when he or she is young enough that another executive would not retire might help support such an argument.

Whether a deferred-wages agreement might be a welfare plan turns on the agreement’s provisions. Coupled with some kinds of provisions, the employer’s use (if any) of a life (including annuity) or health (including disability) insurance contract could bolster an argument that the overall arrangement is a welfare plan.

Whether I try to leave room for an argument that a deferred-wages agreement isn’t a plan (or try to set up reasons why an agreement must be an ERISA-governed plan) turns on whether I represent the executive or the employer, where my client is and which courts might be involved, and other surrounding circumstances.

[Lori Friedman]

Bearlee, I'm guessing that you're referring to an I.R.C. Sec. 457(f) arrangement provided by an exempt organization, not by a governmental unit.

The issue is: Who's eligible to participate? There's an inherent conflict between ERISA and Sec. 457(f). ERISA requires that any deferred compenstion plan be funded by a trust (or annuity contracts/custodial accounts), yet an exempt organization's Sec. 457(f) plan must be an unfunded arrangement. A 457(f) plan will violate ERISA, therefore, unless the following exception applies -- participation must be limited to top-hat employees (a select group of management or highly compensated employees, determined by the facts and circumstances). If participation is thus limited, the plan isn't subject to ERISA.

Please see:

ERISA Sec. 201(2)

ERISA Sec. 301(a)(3)

ERISA Sec. 401(a)(1)

Also, in Advisory Opinion 90-14A, the Dept. of Labor stated that amounts deferred under a top-hat arrangement are not plan assets that must be held in trust.

[Steelerfan]

My guess is they never filed a top hat plan registration statement and thus would like for the arrangement to be completely exempt from ERISA instead of mostly exempt. If the plan is ERISA-covered, it could be a disaster if the employee isn't in the top hat group, but then there is a lot of hidden risk out there in that regard anyway.

[jpod]

Fiduciary Guidance Counsel mentions the first line of inquiry: Could the arrangement possibly be a "pension plan" under ERISA? While this is somewhat of an oversimplification, if the arrangement is that Executive X receives $Y if he remains employed through Z Date, and he is 40 years old or younger, I would say that it is not a "pension plan," in which case ERISA would not apply. The age of 40 is not in the law, but I was using it as an example which you will understand when you look up the definition of "pension plan" in ERISA.

[Steelerfan]

I agree, that's what I was getting at with the completely exempt (not a plan) vs partially exempt (top hat).

The irs guidance i've seen in this area refers to ERISA's requirement that a pension plan (paraphrased) "systematically defer income to retirement or beyond." If the plan would pay out during employment, it might not be a pension plan subject to ERISA. That's the rationale the IRS used in ruling that employee stock purchase plans are not subject to ERISA.

But more fundamentally, and probably more importantly, the issue (raised by FGC) is actually one layer deeper than whether it is a pension plan--that is whether it is really a "plan" at all that requires some form of administration other than simply paying out money at some time (the Darden case). If a company agrees to pay x an amount of money at retirement, it might not be a "plan" for purposes of ERISA if there is little or no administration. But how much administration can exist before it becomes a "plan" is always the snafoo. I'm sure the cases cited above would go a long way in pinning down how OP should treat this, but there may never be the certainty you would want.

I know in the banking industry they do a lot of one off agreements for individual retirees that are not treated as ERISA plans, maybe in some cases they should be subject to ERISA, who knows!?