Fifth Circuit Holds Deferred Compensation Plan Is Governed By ERISA

The decision details important implications for employers that use deferred compensation arrangements.

The U.S. Court of Appeals for the Fifth Circuit issued a decision on July 14 in Tolbert v. RBC Capital Markets Corp.,1 holding that a deferred compensation plan through which RBC financial advisors received annual bonuses and made other income deferrals was an "employee pension benefit plan" governed by the Employee Retirement Income Security Act of 1974 (ERISA).2 The court reasoned that, although the RBC plan's "primary purpose" was not to provide retirement income, it nevertheless was governed by ERISA because its express terms "result[ed] in a deferral of income by employees for periods extending to the termination of covered employment or beyond."3

ERISA's "Employee Pension Benefit Plan" Definition

ERISA's coverage extends to, among other types of plans, "employee pension benefit plan[s]."4 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."5

RBC's Wealth Accumulation Plan

The plan at issue in Tolbert was RBC's Wealth Accumulation Plan (WAP). The WAP was a deferred compensation plan through which participants—primarily RBC financial advisors—could defer a portion of their annual pay. It was also the exclusive vehicle through which RBC paid financial advisors annual productivity bonuses.

The WAP's stated purpose was to allow a "select group of management or highly compensated employees" to defer a portion of their annual pay in an effort to promote "long-term savings and [to] allow such employees to share in [RBC's] growth and profitability, if any."6 The WAP was expressly designed so that, in the event that it was determined to be an employee pension benefit plan under ERISA, it would constitute a "top hat" plan.

The term "top hat" plan is a colloquial reference to "a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees."7 ERISA expressly exempts top hat plans from its vesting, funding, and fiduciary duty requirements.8

District Court Proceedings

The Tolbert plaintiffs are former RBC employees who participated in the WAP and who, upon their termination from employment at RBC, forfeited some of their WAP benefits pursuant to the express terms of the plan.9 The plaintiffs sued RBC for breach of fiduciary duty under ERISA, seeking to recover their forfeited benefits on the theory that the plan was not a valid top hat plan, and, thus, the forfeiture of their plan benefits violated ERISA.10

RBC moved for summary judgment on two grounds...