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Is Your Shareholder Succession Plan Subject to ERISA?


November 12, 2013
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Up to now, many firms could not conceive of succession plan as being subject to ERISA. Fortunately, the Fifth Circuit, in Cantrell v. Briggs & Veselka Co., confirmed a 2-1 decision after a rehearing and held that deferred compensation provisions in two employment contracts did not constitute a plan under ERISA. This decision does not preclude the possibility of such a classification under a different set of facts or under the analysis of the dissent. There are several issues common to employment contracts and shareholder agreements, particularly non-compete and claw-back provisions designed to protect the employer from having to make payments to a former employee engaged in direct competition. How does an employment contract with deferred compensation provisions rise to the level of an ERISA plan? Why would a litigant want ERISA status? Carol Cantrell is an attorney and CPA, and a noted speaker and author on taxation. Eleven years earlier, Carol and her husband, Patrick Cantrell, also an attorney, merged their accounting practice into Briggs & Veselka Co. (Briggs). The agreement called for a series of payments upon retirement (four times W-2 salary) payable over ten years and a small redemption payment for stock. Her husband left the accounting firm of four years before she announced she was leaving Briggs to practice law with her husband. The Briggs firm terminated the husband’s payments and refused to pay her. The Cantrells sued in state court and Briggs sought to remove the litigation to federal court on the grounds that the deferred compensation arrangement was an ERISA plan. Why would Briggs or anyone for that matter want ERISA to apply? The answer is that, under ERISA, a plan administrator’s decision to pay or not pay claims is given a great deal of deference. Briggs contended the plan was a “top hat” plan which meant the Briggs firm could act as the “decision maker” without violating ERISA.  29 U.S.C. 1101 (a) exempts top hat plans from oversight, reporting and fiduciary duties under ERISA and forfeiture of benefits for cause is a common provision. If federal law applied, the state law claims cannot be successfully asserted by Cantrell. What would it take to become an ERISA plan? An ERISA plan would require the employer to engage in an ongoing administrative scheme that requires particularized administrative discretionary analysis. There are several factors that should be considered and firms should review their agreements to ascertain whether they are close to satisfying the requirements set out in this and other decisions. Qualifying for ERISA status would require additional administrative responsibility, a burden that many firms that have reluctant to accept or assumed did not apply. The dissenting opinion in Cantrell stated that the ability to terminate an employee for cause was a sufficient administrative scheme to invoke ERISA. No doubt, this argument will be made again, perhaps in another circuit, by a firm seeking to terminate payments of deferred compensation.