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Incentive Programs - Are They Subject to ERISA?

Posted by Paul D. Woodard | Jun 06, 2017 | 0 Comments


Most company health and retirement benefit plans are subject to the regulations set forth under the Employee Retirement Income Security Act of 1974 (ERISA). However, other benefits programs, including employer bonus or incentive programs, are set up with the understanding that ERISA does not apply. Nevertheless, some bonus and incentive programs may be subject to ERISA, subjecting employers to additional restrictions and possible liability.

Generally, most bonus and incentive programs are not subject to ERISA. This includes payments made by an employer as a bonus for work performed. However, if the bonus plan is deferred until the employee leaves the company, retires, or provides retirement income, the plan may fall under the guidelines of ERISA.

A bonus or incentive plan which is set up to provide retirement income to employees is generally subject to ERISA. However, plans that defer a portion of the bonus until after the employee leaves the company or reaches a certain age may or may not be subject to ERISA, depending on how the plan is set up.

In the federal court case Miller v. Olsen, 62 EBC 1845 (D. Or. 2016), a former employee filed a lawsuit against his former employers alleging an incentive plan was subject to ERISA's vesting requirements. After a review, the bonus plan in the Miller case was found to be an Equity Growth Plan (EGP) not subject to ERISA. In making its finding, the court pointed to the fact that (1) the plan's express terms do not contemplate a method of funding; (2) the express terms do not contemplate an ongoing administrative scheme; and (3) its primary purpose is not to provide deferred compensation.

The court explained that the express terms of an ERISA plan must enable a reasonable person to ascertain the plan's source of financing and an ongoing administrative scheme. In Miller, the express terms of the plan did not provide either a source of financing or administrative scheme. Additionally, because there were express terms to describe the plan, the court did not need to look at the surrounding circumstances to determine whether a de facto plan had been created.

According to the court decision, an important consideration in determining whether a plan is subject to ERISA is whether the primary purpose is to provide deferred compensation. In Miller, the primary purpose of the bonus plan was to “reward employees and encourage longevity by creating shares that employees could cash-out upon termination of their employment.” Thus, according to the express terms of the bonus plan, it was not to provide deferred compensation.

The Miller case illustrates how ERISA does not generally apply to employee bonus or incentive plans unless payment is systematically deferred to the end of the employment contract or beyond or intended to provide retirement income.

If you have any questions about ERISA regulations and your company's bonus or incentive plan, Butterfield Schechter LLP is here to help. We can assist in identifying whether your existing plan may be subject to ERISA or help set up a new bonus plan to avoid ERISA restrictions. Contact our office today with any questions you have on how we can help you and your business succeed.

About the Author

Paul D. Woodard

Paul Woodard practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Estate Planning.


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