Man at the BeachThe fact that a compensation arrangement can provide a substantial source of income in retirement doesn’t make it subject to ERISA. That was the result the U.S. Court of Appeals for the Second Circuit delivered to three former partners of Booz Allen, a consulting company. The case serves as a helpful primer on the definitional limits of an ERISA “retirement” plan.

Partners Only

The trio sued the company when they didn’t receive the payout they were expecting. Under Booz Allen’s Stock Rights Plan (SRP), partners can acquire company shares at attractive prices. The only people who stand to benefit from the SRP are Booz Allen partners who own the privately held company. Under the SRP, Booz Allen buys back the common shares within two years of a partner’s separation from the business, including because of retirement.

Two of the three plaintiffs had no common stock in the company under this buyback arrangement when Booz Allen sold a company division to an outside buyer. Thus, the plaintiffs claimed, they weren’t sufficiently compensated for the sale. The lawsuit alleged that Booz Allen “improperly discriminated among different Booz Allen officers and violated the duties of due care, loyalty, and good faith, in violation of ERISA.”

ERISA and the SRP

ERISA defines a retirement plan as:

… any plan, fund, or program … to the extent that it … provides retirement income to employees, or results in a deferral of income by employees for periods extending to the termination of covered employment or beyond, regardless of the method of calculating the contributions made to the plan, the method of calculating benefits under the plan, or the method of distributing benefits from the plan.

The appeals court, like the trial court below it, found that the SRP “has little to do with retirement.” Instead it’s primarily a vehicle through which Booz Allen can remain entirely “owned by the partners, with no outside control,” and obtain working capital. SRP participants receive an ownership stake in Booz Allen in exchange for a capital injection. The benefits of that ownership stake are enjoyed by SRP plan participants while they’re working and aren’t deferred until their retirement. This holds true even if the ownership stake can be turned into cash following retirement, the court concluded.

Also, according to the court, the ERISA language “provides retirement income” doesn’t “cover every instance in which a person cashes out an investment after retirement, even though a participant will have anticipated this income when planning for retirement.” The words “provides retirement income” refer to plans designed to pay retirement income. Under Booz Allen’s SRP, participants received and enjoyed the present benefit from their contributions before retirement. The later receipt of cash on the sale of the asset after retirement doesn’t mean that the SRP “provides retirement income” within the meaning of ERISA.

The court also found support for its conclusion in a Department of Labor regulation stating that partnership buyout agreements aren’t subject to ERISA. Booz Allen’s repurchase of an SRP participant’s stock is effectively a partnership buyout agreement, the court concluded, and the SRP isn’t an “employee pension benefit plan.” Thus, the plaintiffs’ ERISA claims failed, as their claim to ERISA coverage was that the SRP is an employee pension benefit plan.

Caution Ahead

The ruling referenced a cautionary statement from an earlier appeals court ruling that addressed a similar issue. ERISA’s definition of “retirement plan,” according to that court, shouldn’t be “stretched to cover any content that can conceivably fit within its reach.”

Headshot of Jenise Gaskin.

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