Brokers should be aware of the implications of a recent court decision and take note that they may be entitled to the money in their deferred compensation accounts whether or not the plan has vested, and whether or not they leave a firm of their own accord or if they are fired for cause. Additionally, employers in the financial services industry should take note on their own deferred compensation plans.
Brokers often receive some sort of deferred compensation plan when they join a new broker dealer, both as an incentive to join the firm and as a carrot and stick to keep the broker. Brokers typically will have to repay the firm the deferred compensation if they leave the firm before the plan vests. (Vesting is typically in the 5-7 year range) Deferred compensation is an arrangement in which a portion of an employee’s income is paid out at a later date after which the income was actually earned. These plans have generally been assumed to be exempt from the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) because they have been considered non-qualified deferred compensation plans. ERISA’s coverage extends to, among other types of plans, “employee pension benefit plan[s].” An employee pension benefit plan, in turn, is defined as “any plan, fund, or program” that, “by its express terms or as a result of surrounding circumstances,” either “(i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond.”
The case that may have changed the landscape in whether these plans are subject to ERISA protections is the recent 5th Circuit case of Tolbert v. RBC Capital Markets. In the case one plaintiff forfeited vested amounts when she was terminated for cause. The other two plaintiffs forfeited unvested amounts when they resigned. The lower court found that the plan was not an ERISA protected plan and did not consider whether the plan was a top hat plan. Top hat plans are exempt from ERISA protections. The Fifth Circuit held that the plan was a pension plan under ERISA, which provides that a plan is a pension plan “to the extent that by its express terms or as a result of surrounding circumstances … [the plan] results in a deferral of income by employees for periods extending to the termination of covered employment or beyond.” The court sent the plan back to the lower court to decide if the plan was a top hat plan which would make it exempt from the protections ERISA provides.
The Fifth Circuit seems to have taken the position that a non-qualified deferred compensation plan is an ERISA pension plan if it permits deferral of compensation to termination of employment. Brokers are often lured to work at a new broker dealer by these plans or are encouraged to stay at their current firm and wait for the plan to vest. Now though, they may be entitled to the benefits of these plans in a much wider set of circumstances.
To learn more about Richard Frankowski, visit The Frankowski Firm.
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