CEO Without Remedy Under ERISA When Deferred Comp Plan Fails to Comply with 409A

Last week, the Sixth Circuit Court of Appeals affirmed the dismissal of state law claims brought by a retired CEO who had been assessed tax penalties on account of deferring large amounts of his compensation under an executive deferred compensation plan without complying with IRC 409A on the grounds that the plan was covered by ERISA which, therefore, pre-empted the state law claims. Wilson v. Safelite Group, Inc. No. 18-3408 (6^th Cir. 7-10-19).  The Court found that deferred compensation plans which permitted distributions during periods of active employment as well as during retirement could still qualify as a pension plan under ERISA.  Further, because the plan permitted the deferral of both bonuses and annual salary, it was not exempt from ERISA under DOL regulations as a bonus plan.


According to the Court’s opinion, the employer created a bonus/incentive plan for five executives if they secured a buyer for the company.  When a likely buyer emerged, the company created a non-qualified deferred compensation plan to help most of those executives avoid adverse tax consequences from the incentive plan bonuses.   Under the deferred compensation plan, the executives could defer their regular annual salary and annual bonuses as well as the incentive bonuses.   The CEO make elections to deter his incentive bonus and large portions of his salary each year under the deferred compensation plan.  The plan’s default deferral provided for the payout to begin shortly after employment ended, but it could also be drawn out over as long as ten years and even permitted withdrawals before employment ended.  The CEO was audited by the IRS in 2014 and it determined that some of the deferrals did not comply with IRC 409A and he was assessed with taxes and penalties.  Two years later, the CEO sued his former employer for breach of contract and negligent misrepresentation.  The employer moved for partial summary judgment on the grounds that the deferred compensation plan was a pension plan governed by ERISA, which pre-empted the state law claims.  The trial court agreed, but permitted the CEO to amend his complaint to bring claims under ERISA.  The CEO declined and instead appealed the ERISA ruling.   The Sixth Circuit affirmed.


The parties disputed whether the deferred comp plan satisfied the ERISA requirements because it permitted withdrawals before retirement. “In essence, the question is whether a plan that allows for distributions both before and after termination can be an ERISA employee pension benefit plan.” The Court construed the statute to not require withdrawals to begin only after employment had ended:

Subsection (ii) does not specify deferral of income “until termination” or “to termination”; rather, it says “for periods extending to the termination.”  Thus, deferrals may occur for various “periods,” and those periods may last up to and/or beyond termination.  Subsection (ii) covers a wide array of plans and does not exclude plans that give participants the option to receive in-service distributions.

The employer’s deferred compensation plan presumed that distributions would not begin until after termination of employment, but permitted participants to elect earlier distributions.   It also stated that it was governed by ERISA.  As long as the plan provided for distributions after termination of employment, the requirements of ERISA were satisfied.


That being said, the DOL had published a regulation exempting certain deferred compensation plans which did not “systematically” defer the payment of “bonuses.” “By regulation, employee pension benefit plans do not include “payments made by an employer to some or all of its employees as bonuses for work performed, unless such payments are systematically deferred to the termination of covered employment or beyond, or so as to provide retirement income to employees.”  29 C.F.R. § 2510.3-2(c).”  In other words, the payment of a bonus is typically not a retirement program and would not be treated as a pension plan unless the payment of those bonuses were systematically deferred to termination of employment.  “A bonus plan may defer payment of bonuses and remain exempt, “unless such payments are systematically deferred to the termination of covered employment or beyond, or so as to provide retirement income to employees.”  29 C.F.R. § 2510.3-2(c) (emphasis added).”  Thus, deferred bonus compensation plans which do not systematically defer the payment of bonuses to post-employment periods are exempt from ERISA.


The court rejected the application of this exemption because the deferred comp plan did not relate exclusively to the incentive bonuses and also permitted the deferral of annual salary and regular annual bonuses.


NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Sixth Circuit Affirms Employee’s ERISA Summary Judgment for Promissory Estoppel, Breach of Fiduciary Duty and Anti-Cutback Violation

[Editor's Note: The Sixth Circuit in October subsequently upgraded its Deschamps opinion  to Recommended for Full-Text publication].

This morning, the Sixth Circuit Court of Appeals affirmed summary judgment for an employee on three ERISA claims after the defendant pension plan reduced his pension credits for the 10 years that he worked for the defendant employer in Canada.  Deschamps v. Bridgestone of Americas, Inc. Salaried Employees Pension Plan, No. 15-6112 (6^th Cir. 9-12-16).  The plaintiff had refused to accept the transfer to the U.S. in 1993 unless he was given pension credit for his prior 10 years in Canada.   The HR and plant managers confirmed with corporate HQ that he would receive that pension credit, which was also included on all of his pension written and online pension summaries until 2010, when the employer reinterpreted the terms of the plan and reduced the pension credits previously awarded to him and other expatriate transfers.  He appealed internally with the Plan, but his appeals were denied and the lawsuit followed.  The Court of Appeals agreed that the undisputed issues of fact in the record confirmed that the employer had been grossly negligent, breached its fiduciary duty and violated the anti-cutback rules in leading him to believe that he would receive the pension credit and then revoking those credits more than 17 years after his transfer and after he rejected two job offers from a competitor (which subsequently went bankrupt).   The employer’s convoluted interpretation of the definition of “supervisor” (which was not otherwise defined in the plan) to exclude the plaintiff (who was an hourly maintenance manager) contributed to the Court’s decision.

According to the Court’s opinion, the plaintiff sought and received assurances from the U.S. plant and human resources managers that they had checked with their corporate office and he would receive pension credit for his 10 years working in Canada if he were to transfer to the U.S. facility in 1993 as the plant maintenance manager. (The retired corporate actuary, however, denied ever approving this information).  For his first 16 years of employment, his online and written pension summaries also listed his 1983 seniority date.  Granted, most (if not all) of these documents stated that they were only estimates and that the actual Plan document governed his eligibility for benefits.  In 2010, the company sought to correct the misapplication of the seniority dates for employees who transferred from outside the U.S. and deducted those 10 years from the plaintiff’s pension accrual.  He appealed internally, but the Plan denied his appeal on the grounds that he was not eligible because he had not been salaried or a “supervisor.”  “Supervisor” was not defined in the Plan or SPD, but the Plan defined it to exclude non-exempt managers like him.  The plaintiff brought suit against the Plan, his employer and its parent company alleging promissory estoppel under 29 U.S.C. § 1132(a)(3), breach of fiduciary duty pursuant to 29 U.S.C. § 1104, and an anti-cutback violation pursuant to 29 U.S.C. §1054(g). The trial court granted him summary judgment on all three claims.  The employer, parent and Plan appealed.

Plaintiffs have a long burden of proof when it comes to promissory estopped claims.  They must show:

(1) conduct or language amounting to a representation of material fact; (2) awareness of the true facts by the party to be estopped; (3) an intention on the part of the party to be estopped that the representation be acted on, or conduct toward the party asserting the estoppel such that the latter has a right to believe that the former’s conduct is so intended; (4) unawareness of the true facts by the party asserting the estoppel; and (5) detrimental and justifiable reliance by the party asserting estoppel on the representation. . . . In the case  of an unambiguous pension plan, the plaintiff must also prove three additional elements: “[(6)] a  written representation; [(7)] plan provisions which, although unambiguous, did not allow for  individual calculation of benefits; and [(8)] extraordinary circumstances in which the balance of equities strongly favors the application of estoppel.”

The Court found that the terms of the Plan were ambiguous because of how it interpreted “foremen” and “supervisors” to exclude non-salaried managers like the Plaintiff when those terms were not defined within the Plan itself.   Further, the defendants conceded that the plaintiff could prove elements (1), (3) and (4).

The defendants attempted to dispute that the Plaintiff could prove that the defendants were aware of the “true facts” because he did not inquire of the corporate HQ pension officials himself, but instead, relied on the plant managers to contact corporate HQ for him.  The Court described this element to require the plaintiff to show “either intended deception or such gross negligence as to amount to constructive fraud.”  The Court construed prior precedent and found that the employer was grossly negligent in assuring the plaintiff for 16 years that he would receive the pension credit and not attempting to correct that mistake (if it was a mistake) shortly after making it in response to his specific inquiries.  Further, the plaintiff could not be held responsible for earlier realizing the mistake in light of the convoluted interpretation of “supervisor” which the Plan adopted (to exclude managers).  Thus, the Court found that the employer could be found liable for “constructive fraud.”

The employer also disputed whether the plaintiff could prove that he detrimentally relied upon the employer’s assurances.  In particular, the plaintiff had rejected attractive job offers from a competitor which subsequently went bankrupt and laid off thousands of employees.   The Court rejected the employer’s argument because there was no evidence that the plaintiff would definitely have been laid off by the competitor.   In addition, there was no legal requirement that the competing job offer be economically better, as long as it was an opportunity which the plaintiff rejected in reliance on his employer’s representations about his pension status.   Further, the plaintiff’s reliance for 16 years on the employer’s written and oral (mis)representation were reasonable when he rejected the competitor’s offer of a higher salary.

As for the breach of fiduciary duty claims, the plaintiff was required to show

(1) Bridgestone acted in a fiduciary capacity in making misrepresentations to Deschamps, (2) those misrepresentations were material, and (3) Deschamps detrimentally relied on the misrepresentations. . . . The second element [was] not disputed. 

The disputed issue was whether the employer was a fiduciary:

A fiduciary is defined by ERISA to include a corporation10 who “exercises any discretionary authority or discretionary control respecting management of [a] plan” or “has any discretionary authority or discretionary responsibility in the administration of such plan.” 29 U.S.C. § 1002(21)(A).  In determining whether a corporation is a fiduciary, rather than looking to the formal title, we use a functional approach, looking to whether it acts in a fiduciary capacity with respect to the conduct at issue.

 While making business decisions which have a collateral effect on employee benefits (such as terminating a plan), processing claims, applying eligibility rules or calculating benefits are not fiduciary  functions, explaining the terms of the plan, and conveying information about likely future plan benefits are fiduciary functions.  Accordingly, in this case, conveying information to the Plaintiff about receiving pension credits and the likely benefits he would receive in the future were fiduciary functions.  The Court also found that the plant and HR managers had apparent authority to bind the employer: “Bridgestone acted as a fiduciary when it, through its agents with apparent authority, misrepresented to Deschamps the status of his pension benefits.”

The employer disputed that it had ever construed the Plan to cover the plaintiff, and, therefore, could not have violated the anti-cutback provisions when in 2010 it retracted his credit for the 10 years he worked in Canada between 1983 and 1993.  It construed the contrary assurances to the plaintiff as a “clerical error.”

ERISA prohibits plan amendments that decrease a participant’s accrued benefits, with two exceptions that do not apply here.  29 U.S.C. § 1054(g).  At issue is whether we look to the text of the Plan or the administrator’s interpretation of the Plan in determining if Deschamps accrued a benefit prior to 1993.  

In essence, an employer can illegally cut-back benefits if it changes or reinterprets the terms of the plan to reduce benefits that a plaintiff reasonably believed provided higher benefits based on a different and plausible interpretation of the plan.

As discussed above, the text of the Plan is at worst ambiguous, but at best, favors Deschamps’s argument that he was a covered employee in 1983 under the classification of  “supervisor.”  It is not untenable that Deschamps, in his capacity as a maintenance manager, was a supervisor under the language of the Plan.  Further, it is undisputed that as a result of the [2010] change in the interpretation of this provision that excluded foreign employees from being classified as covered employees, Deschamps’s benefits were decreased. Therefore, Deschamps has established an anti-cutback violation . . .

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Sixth Circuit: Retired Employee Can Assert ERISA Claim Based on False Information Provided in Written Benefit Estimate

Last week, the federal Sixth Circuit Court of Appeals in Cincinnati issued a decision recognizing for the first time that a plaintiff can assert an estoppel claim against a pension plan under ERISA when the plaintiff relied to his detriment upon a written and certified estimate of his monthly retirement benefit in making his decision to retire and then was then told two years later that his actual benefits were substantially lower than the prior estimate, that his future benefits would be reduced accordingly and that he was requested to repay approximately $11,000 to the retirement plan. Bloemker v. Laborers Local 265 Pension Fund, No. 09-3536 (6^th Cir. 5/19/10). However, the Court affirmed the dismissal of the plaintiff's statutory and breach of contract claims.

According to the Court's opinion, the plaintiff's 2005 annual statement of status estimated that he "would be entitled to to a monthly benefit pension of

$2,666.99." Interested, he contacted the third-party administrator of his pension plan "to discuss the possibility of early retirement. He received a letter from her

stating that if he were to retire on April 1, 2005, he would be eligible for "approximately $2,564.00 per month, single life annuity, payable for your lifetime only."

Based on this, the plaintiff applied for early retirement benefits on February 10, 2005" and on March 1, 2005, he received a Benefit Election Form which was stamped by the TPA, stated that he would receive $2,339.47 per month for his life, and contained a certification stating:

Based on our records of your hours worked under the Plan and the contributions which have been made on your behalf, we hereby certify that you are entitled to receive the retirement benefit specified above, and that the amount shown for any optional forms of payment are equivalent to your basic benefit.

The plaintiff retired and in 2006 received a letter from the TPA indicating that a computer error caused it to miscalculate his early retirement benefits, that he was entitled to $500/month less than previously indicated and that he needed to repay the approximately $11,000 he had been overpaid to date. The plaintiff filed suit after exhausting his administrative remedies under the plan. In his suit, he alleged that the Plan and the TPA should be equitably estopped from denying him the larger retirement benefit on account of their material misstatements on which he relied to his detriment. He also alleged that the Plan and TPA breached a written contract to him in the application for benefits and that the TPA breached its statutory fiduciary duties to him. The trial court dismissed his claims

In the past, the Sixth Circuit has – unlike other circuit courts -- been reluctant to recognize estoppels claims against pension plans because estoppel "cannot be applied to vary

the terms of the unambiguous plan documents." In addition,

pension benefits are typically paid out of funds to which both employers and employees contribute. Contributions and pay-outs are determined by actuarial assumptions reflected in the terms of the plan. If the effective terms of the plan may be altered by transactions between officers of the plan and individual plan participants or discrete groups of them, the rights and legitimate expectations of third parties to retirement income may be prejudiced.

The Court remains unwilling to accept estoppels claims based on oral or verbal statements by low level employees which modify the written terms of the plan. "This policy concern is

greatly lessened when the representations at issue are made in writing, and, particularly here, where the representations constituted formal certifications."

Under Sixth Circuit precedent,

the elements of an equitable estoppel claim are: 1) conduct or language amounting to a representation of material fact; 2) awareness of the true facts by the party to be estopped; 3) an intention on the part of the party to be estopped that the representation be acted on, or conduct toward the party asserting the estoppel such that the latter has a right to believe that the former's conduct is so intended; 4) unawareness of the true facts by the party asserting the estoppel; and 5) detrimental and justifiable reliance by the party asserting estoppel on the representation.

The Court found these elements to be satisfied by the plaintiff's allegations in this case. It found the defendants' alleged gross negligence sufficient to constitute constructive fraud. Moreover, while it generally has found that a plaintiff can not prove justifiable reliance on a misrepresentation if the misstatement contradicted unambiguous plan documents, in this case, the plaintiff alleged that "it would have been impossible for him to determine his correct pension benefit given the complexity of the actuarial calculations and his lack of knowledge about the relevant actuarial assumptions."

We hold that a plaintiff can invoke equitable estoppel in the case of unambiguous pension plan provisions where the plaintiff can demonstrate the traditional elements of estoppel, including that the defendant engaged in intended deception or such gross negligence as to amount to constructive fraud, plus (1) a written representation; (2) plan provisions which, although unambiguous, did not allow for individual calculation of benefits; and (3) extraordinary circumstances in which the balance of equities strongly favors the application of estoppel.

The Court affirmed the dismissal of his fiduciary duty claims and breach of contract claims.

Section 1132(a)(1)(B) of ERISA provides that a plan beneficiary may bring suit "to recover benefits due to him under the terms of his plan." 29 U.S.C. § 1132(a)(1)(B). As discussed above, the written ERISA plan documents govern the rights and benefits of ERISA plan beneficiaries. . . . . Where a retirement plan creates benefits in excess of those established by ERISA, however, those rights may be enforceable in contract under federal common law. . . . Furthermore, when additional documents operate to modify or amend the plan, a beneficiary can rely on those modifications to determine his benefits. . . . .

However, the Benefit Election form submitted by the plaintiff "did not purport to be an amendment or a modification to the Plan. Nor did it purport to create a separate contract for benefits in addition to those provided by the Plan. Instead, it simply claimed to provide the actuarially certified benefit [the plaintiff] was entitled to, based on the Plan." Thus, there was no basis for asserting a claim for breach of contract.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.