Retention Bonuses

In the case of a merger, acquisition, asset sale, or other corporate reorganization, an executive or other employee may be wary of staying on through implementation of the change and during the time thereafter. In order to induce certain employees to keep from resigning or searching for other jobs, the employer may offer a retention bonus, which is additional compensation paid to an employee if he or she remains employed through a specified date or time period. Such bonuses are generally used to reward the employee for staying with the employer until his or her position is eliminated, thereby lessening the business disruption of the corporate reorganization.

Does federal ERISA law apply to lump sum retention bonuses? Many retention bonuses may not be subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). This is because the U.S. Supreme Court has held that, in order to qualify as an ERISA plan, there must be an ongoing administrative scheme relating to the payment of employee benefits. As a result, a lump sum retention bonus would not meet this ongoing requirement and would instead be considered a mere payroll or compensation practice (as opposed to a payment of employee benefits) not subject to ERISA.

Does the structure of your retention bonus require an ongoing administrative scheme? If the retention bonus is structured pursuant to a more complex scheme, the provisions of ERISA may apply. A retention bonus plan may be an ERISA plan if, for example, the plan provides for the deferral of income to termination of employment or an additional retirement benefit. In addition, a retention bonus plan may be deemed an ERISA welfare benefits plan if it is implemented in conjunction with a severance plan that constitutes an ERISA plan. Overall, important considerations often used by courts in determining whether a plan is an ERISA plan include: whether the employer’s obligation requires managerial discretion in its administration, whether a reasonable employee would perceive an ongoing commitment by the employer to provide benefits, and whether the employer was required to analyze the circumstances of each employee’s termination separately in light of certain criteria.

Does it matter whether ERISA applies? The inquiry as to whether ERISA applies to a retention bonus plan is important because ERISA imposes many requirements that serve to protect plan participants and beneficiaries. For instance, Title I of ERISA establishes rules regarding minimum participation, vesting, distribution, minimum funding, fiduciary standards and the requirement that plan assets be held in trust. If ERISA applies, an employer will be much more hard-pressed going back on promises made with respect to the retention bonus plan.

Therefore, before agreeing to any retention bonus plan, and deciding to remain with an employer after a corporate reorganization, an executive or other employee must assess whether the employer’s plan is covered by ERISA and thus offers the enhanced protections noted above.

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