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Compliance June 30, 2016
Court Finds Equity Compensation Plan Not an ERISA Plan
An appellate court agreed with a lower court that the plan’s purpose was not to provide deferred compensation or retirement income.
Reported by Rebecca Moore
The 9th U.S. Circuit Court of Appeals has ruled that the Stock Rights Plan (SRP) offered to certain Booz Allen Hamilton employees is not a plan covered under the Employee Retirement Income Security Act (ERISA), so former participant Foster Rich could not bring ERISA claims against the company.
The court noted that, under the plan document, although SRP participants were “expected to hold their shares until they leave the firm,” they were “not precluded from selling paid-up stock back to the firm at any time.” The SRP states that its purpose is “to provide incentives for [Booz Allen Hamilton] officers to continue to continue to serve as employees of the Company and its subsidiaries.”
The court noted that ERISA coverage extends to employee pension benefit plans and a plan qualifies as such if “by its express terms or as a result of surrounding circumstances such plan (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.”
Rich argued that the fact SRP participants could hold their shares until the end of employment was sufficient to establish ERISA coverage. He cited Tolbert v. RBC Capital Mkts. Corp. in which the 5th U.S. Circuit Court of Appeals found a wealth accumulation plan (WAP) offered to executives of RBC Capital Markets Corporation is a “pension plan” under ERISA. But, the 9th Circuit noted that the plan in that case was referred to by the company as a “deferred compensation plan” and its main purpose was to allow for deferral of compensation.
“Moreover, the mere possibility that income can be deferred does not mandate ERISA coverage,” the appellate court wrote in its opinion.
Rich received a negative evaluation from the company and it was recommended that he retire, so he did in 2005. He had accumulated 30,500 shares of company stock, and the company repurchased the shares for $4,507,900, or $147.80 per share.
In 2008, Booz Allen Hamilton sold a portion of its business to The Carlyle Group, and shareholders of Booz Allen Hamilton stock received $763 per share. In 2009, Rich filed a lawsuit alleging breach of contract and causes of action under ERISA. The breach of contract claim was found to be time-barred.