How to Insure Your Income: Deferred Comp as Pension
As a form of retirement or pension plan, deferred compensation is subject to some of the requirements of the Employee Retirement Income Security Act (ERISA).
Non-qualified plans don't have to be filed or approved by the IRS for tax purposes. However, ERISA requires that the employer notify the Department of Labor of the plan's existence and participants.
ERISA has certain reporting and disclosure, as well as fiduciary responsibility, requirements with specific employee welfare benefit plan regulations. It also imposes certain non-tax requirements for employee benefit pension plans.
Non-qualified deferred compensation plans fit the definition of an employee pension benefit plan and, to the degree that they also provide disability or death benefits, they are considered employee welfare benefit plans. So, they're usually subject to some of the reporting requirements of ERISA.
These requirements include:
- filing a plan description with the Department of Labor every five years;
- providing each participant with a summary plan description, which must be revised every five years if there are any plan amendments (otherwise, the plan must be updated every 10 years);
- maintaining records and making documents available to any interested party.
An alternative method of compliance available for unfunded deferred compensation plans simply permits the plan administrator to file a general statement regarding certain aspects of the plan. This statement is furnished to the DOL.
If the deferred comp plan is a qualified plan and includes all eligible employees as participants, then the plan administrator must comply with the participation, vesting and funding requirements of ERISA. In addition, a qualified deferred comp plan also must comply with the fiduciary duties and responsibilities imposed by ERISA.
The 1993 federal appeals case Joan Weber v. Saint Louis University considered a disability claim made under a kind of deferred compensation plan.
Between 1981 and 1984, Weber was studying for her master's degree in business administration. In 1983, she was hired as an assistant with the University's Small Business Development Center. She worked there part time until she received her degree in 1984; she then became a full-time employee until the elimination of her position in September 1986.
Weber was eligible to participate in the retirement plan in effect at the university. She applied to do so in early 1986 and was accepted for participation that April. The retirement plan used the contributions of participants to buy annuity contracts from TIAA/CREF (a large insurance company primarily serving university and college employees). After an employee completed three years of continuous employment, the university would match any contributions made by the employee.
Weber also was covered under group disability insurance obtained through TIAA/CREF. That plan provided two different types of benefit in the event an employee became disabled -- monthly income payments based on a percentage of regular salary and monthly premium payments toward any annuities already purchased under the retirement plan by the university's matching contributions.
The only condition on the income payments was that the employee's period of disability had begun while the employee was insured (in other words, while the employee was working for the university). To be eligible for the annuity premium payments, however, an employee's period of disability had to have begun at a time when the university was making matching contributions toward the employee's retirement plan.
In 1988, Weber applied for disability benefits under the group disability insurance in effect at the time of her employment with the university. TIAA/ CREF initially approved Weber's application for income payments and annuity premium payments, but the university challenged that approval with respect to the annuity premium payments. (Under the terms of the group disability insurance contract, the university had the right to overrule a preliminary determination by TIAA/CREF of coverage for an employee.)
The university contended at that time -- because of her part-time employment -- Weber had not completed enough years of service to have become eligible for matching retirement contributions from the university and, accordingly, for the annuity premium payments. Consequently, TIAA/CREF made only the income payments to Weber.
In 1989, Weber sued the university in federal court. She alleged that she had completed enough years of service to have become eligible for matching retirement contributions as of June 1986, and was therefore entitled to those contributions under the retirement plan. (Interestingly, she did not argue that eligibility for matching retirement contributions also would allow the annuity premium payments under the group disability insurance.)
The trial court ruled that, because the university had not challenged Weber's disability at the relevant times, it would not allow discovery on the issue of when Weber became disabled.
At this point, the university made some tactical errors. It conceded that Weber had completed enough years of service as of June 1986 to become eligible for matching retirement contributions. But it argued that Weber's period of disability had begun at a point when it was not making matching contributions toward her retirement plan. Therefore, it was not liable for any annuity premium payments under the group disability insurance plan.
The trial court rejected the university's arguments and granted a summary judgment in favor of Weber.
On appeal, the university argued that the trial court erred in refusing to allow it to hear evidence regarding when Weber had become disabled and, therefore, whether she was covered under the university's group disability insurance at that time.
The appeals court agreed with the university and ordered the issue of when Weber had become disabled to be part of the case. This essentially destroyed her argument -- so she settled for the disability benefits.
