Retirement Bonus -- Is It Vested?

[Guest Richard Bellamy]

So, a company has a retirement plan that they institute, and add a reference to it in their Employee Handbook. The Handbook reads (in full):

YOU ARE ELIGIBLE TO PARTICIPATE IN THE [name] RETIREMENT PLAN. PLEASE CONSULT THE PLAN DOCUMENTS FOR SPECIFICS.

YOU WILL BE AUTOMATICALLY VESTED AFTER THREE YEARS OF CONTINUOUS SERVICE.

The next year, the company decides to offer a retirement bonus (unrelated to the retirement plan.) Another sentence is added to the Employee Handbook (between sentences 2 and 3, above):

AN EMPLOYEE WHO RETIRES IN GOOD STANDING WITH OVER 25 YEARS OF SERVICE WILL RECEIVE A BONUS EQUAL TO . . . [and then lists the benefit].

The only references to this plan are the board minutes approving it, and this sentence in the Employee Handbook. The company now wants to eliminate this benefit, but I am afraid that they have created a vested benefit for employees with three years of service by putting it on the same page of the handbook as the vesting language.

Thoughts? Disagreements?

[david rigby]

Could be an ERISA plan. Employee Handbook is probably less important than formal action of the company's Board of Directors. Anything?

[Ron Snyder]

This is certainly a plan of deferred compensation and would fall under Section 409A unless a formal plan document is drawn up in a form that complies with 401(a). 409A treatment would mean that it is not deductible to the employer until the employee vests, at which time it is taxable to the employee and deductible to the employer.

Is this really what they intended?

Clearly, in any event, the Employee Handbook needs to be revised. It should reference the SPD (not simply the plan documents) for the qualified plan, and the plan description or plan documents for the non-qualified plan.

[Guest Richard Bellamy]

Could be an ERISA plan. Employee Handbook is probably less important than formal action of the company's Board of Directors. Anything?

Thanks for the insights, David and vegaguru.

There was board action approving the retirement bonus, but nothing more.

My issue is, I guess, there would be no vesting at all if not for the fact that someone put the retirement bonus on the same page (and directly above) the vesting language.

On the one hand, as there is nothing else, it looks to me like the retirement bonus is a non-qualified ERISA plan with a three year vesting schedule. On the other hand, I feel like there has to be some sort of "out" for what is essentially a form of Scrivener's Error, based on the placement of the bonus in the "wrong" place in the handbook.

[masteff]

...but I am afraid that they have created a vested benefit for employees with three years of service...

It's a minor nuiance but vested and accrued are two separate things. At the very least you have a problem on anyone w/ over 25 years of service, but whether you have issues w/ removing a benefit from people who have not yet accrued it is something I'll leave to people more expert on that.

[david rigby]

The phrase "retirement bonus" is uncommon (extremely). Is it possible that someone (management, owner, etc) used a term that is common in a different culture or country, which has a different meaning that its use here? (No disrespect intended, just thinking outside the box. As you may know, for example, "pension scheme" is common in the UK, but that phrase seems very awkward in the US.)

- I think vebaguru asked the best question: "Is this really what they intended?" Until the true intent is understood, it may be difficult to know what step(s) to take next.

- For example, if a true retirement plan is intended, then other ERISA issues will come up: written document, EE communication, who is covered, govt. filings, etc.

[Guest Richard Bellamy]

The phrase "retirement bonus" is uncommon (extremely). Is it possible that someone (management, owner, etc) used a term that is common in a different culture or country, which has a different meaning that its use here? (No disrespect intended, just thinking outside the box. As you may know, for example, "pension scheme" is common in the UK, but that phrase seems very awkward in the US.)

- I think vebaguru asked the best question: "Is this really what they intended?" Until the true intent is understood, it may be difficult to know what step(s) to take next.

- For example, if a true retirement plan is intended, then other ERISA issues will come up: written document, EE communication, who is covered, govt. filings, etc.

It was definitely NOT the intent to create a vested benefit. The "intent," to the extent we can determine what a group of people were collectively thinking, was to pay employees who retired after 25 years a bonus of 1 weeks' salary per year worked. Nobody was thinking beyond that in any way. The referred to it as a "retirement bonus," and defined it as such.

[david rigby]

This company likely needs the advice of an experienced ERISA attorney, and soon.