Opinion
1:02CV00829.
January 23, 2003.
RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
This case comes before the Court on defendant's motion for judgment on the pleadings. That motion has been fully briefed and is now ready for decision.
Facts
The facts used to decide this motion, as set out in plaintiff's complaint and in Exhibit A of defendant's answer, are as follows. Plaintiff, for "many years" was an employee of defendant, but was dismissed from his job on January 28, 2001. While he was employed with defendant, plaintiff was a participant in a Stock Appreciation Rights Plan (the Plan).
Under the Plan, certain selected employees of defendant, including plaintiff, were given "Deferred Compensation Units" or "Units." These Units were awarded to all participants in the plan by the Plan Administrator. Each Unit, at the time it was awarded, had a value equal to the value of one share of defendant's common stock. When awarded, the Units were placed into an account assigned to the participant that received the award. At the end of five years from the time a Unit was awarded, the participants were paid an amount based on any increase in fair market value it would have accrued, as well as dividends it would have earned, during the five-year period had it been a share of common stock. This payment could be paid prior to the end of the five-year period in the event that a participant retired or died. In cases of termination for reasons other than retirement, the Administrator had discretion as to whether or not to make any payment.
In plaintiff's case, he was terminated by defendant and the Administrator did not elect to pay plaintiff any amount in plaintiff's account. Consequently, plaintiff filed this suit claiming that defendant owes him $60,000 in benefits under the Plan. Although this result is not dictated by the plain terms of the Plan, plaintiff claims that the plan is an employee pension benefit plan under certain provisions of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001, et seq. According to plaintiff, ERISA's vesting requirements control and compel the payment despite the language of the Plan.
Discussion
Defendant has moved for judgment on the pleadings pursuant to Fed.R.Civ.P. 12(c). In deciding this motion, the Court must construe all allegations in the pleadings in plaintiff's favor and cannot dismiss the case unless it appears "beyond a doubt that the plaintiff could prove no set of facts in support of his claim which would entitle him to relief." Bruce v. Riddle, 631 F.2d 272, 273274 (4th Cir. 1980). Also the Court cannot consider evidence outside the pleadings without converting defendant's motion into one for summary judgment under Fed.R.Civ.P. 56 and giving both parties a chance to present further evidence. Fed.R.Civ.P. 12(c)
Here, no party has submitted evidence outside the pleadings. However, defendant has attached a copy of the Plan to its answer. Pursuant to Fed.R.Civ.P. 10(c), this is a written instrument which is considered part of the pleading. See Charles Alan Wright Arthur R. Miller, Federal Practice and Procedure § 1327 (2d Ed. 1990). Also, plaintiff has not objected to the document or alleged that it is inaccurate. Therefore, the Court can and will consider the Plan, as attached to defendant's answer, in deciding defendant's motion.
Defendant bases its motion on two arguments. First, it contends that the Plan is not subject to ERISA's vesting requirements because it does not, as a matter of law, qualify as a pension plan under ERISA. Second, it claims that even if the Plan is an ERISA pension plan, it is exempted from the vesting requirements because it is a "top hat" plan which is unfunded and primarily designed to offer deferred compensation for a select group of management or highly compensated employees.
The parties agree that to be controlled by ERISA's vesting requirements, a plan must be a "pension benefit plan" and that this is defined by 29 U.S.C. § 1002(2)(a) (ii) which states that a pension benefit plan is one that "results in deferral of income by employees extending to the termination of covered employment or beyond." The question then is whether this somewhat general definition covers the plan at issue in this case.
Defendant contends that this question can be answered by looking to regulations issued by the United States Department of Labor. Specifically, it relies on 29 C.F.R. § 2510.3-2(c) which states that "payments made by an employer to some or all of its employees as bonuses for work performed, unless such payments are systematically deferred to termination of covered employment or beyond, or as to provide retirement income to employees" are not "employees pension plans" or "pension plans." According to defendant, the Plan falls within the description set out in this regulation, and, therefore, is not a pension plan covered by ERISA's vesting requirements. Plaintiff disagrees with this conclusion for two reasons.
Plaintiff first contends that the regulation cited by defendant does not apply to its plan because the regulation covers only payments made as "bonuses" and payments made under the plan are not bonuses. Plaintiff defines a bonus as "`something given or received that is over and above what is expected." (Pl. Brf. at 3, citing, Webster's Third New International Dictionary) Plaintiff claims that, because the amount of payments under the Plan are determined using stock dividends, an amount which is expected, they are not bonuses. This argument clearly fails under the plain language and structure of the Plan.
First, the plain language of the Plan states that payments under the Plan are to be made as a "bonus." (Answer, Ex. A, ¶ 7(a). Second, plaintiff incorrectly states the way that payments are calculated under the Plan. It is true that dividends do comprise a portion of the payment. However, the payment is also made up of any increase in the fair market value of the Units in a participant's account between the time they are awarded and the time they are earned. Third, plaintiff's argument ignores the structure and purpose of the plan. The Units themselves are not part of the participant's standard compensation and are awarded at the discretion of the Plan Administrator. Further, they give participants the opportunity to earn extra money by seeing that defendant's stock does well enough to earn dividends and increase in value over time. This is clearly the intent of the Plan given that participation was restricted to personnel who played key roles in the operation of the company.
In essence, the plan participants all got their standard compensation whether defendant's stock paid dividends or increased in value or not. They received money under the Plan only if defendant performed well enough to pay dividends and increase the value of its stock. All payments under the Plan, whether comprised of dividends or based on increased value, were clearly performance bonuses given to key personnel. As such, they do fall within the regulation concerning bonuses cited by defendant.
Plaintiff's next argument is that, even if payments under the Plan are considered bonuses, the regulation relied on by defendant is invalid because it conflicts with the plain language of 29 U.S.C. § 1002(2)(a) (ii) that pension plans are plans which result "in deferral of income by employees extending to the termination of covered employment or beyond." Plaintiff's contention is based on the regulation's statement that bonus payments are not a pension plan unless they systematically defer compensation to the end of employment or beyond. Because no mention of systematic deferral is present in the underlying statute, plaintiff believes that the regulation is at odds with the statute. Plaintiff believes that once the regulation is invalidated, the fact that it is possible for employees to receive income under the Plan beyond their employment (if they retire or die or the Administrator allows it) meets the "extending to the termination of employment or beyond" language of the statute.
Plaintiff has not argued that if the payments under the plan are considered bonuses, the Plan does fall within the language of 29 C.F.R. § 2510.3-2(c). He claims only that the payments are not bonuses and that, if they are, the regulation is invalid.
It is true that a regulation which is in conflict with the statute it interprets cannot be upheld. Public Employees Retirement System of Ohio v. Betts, 492 U.S. 158, 171, 109 S.Ct. 2854, 106 L.Ed.2d 134 (1989). However, where a statute is ambiguous or silent on a matter, regulations are entitled to deference as long as they are based on a permissible construction of the statute. Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984).
The parties have not cited, and the Court has not found, prior case law addressing the validity of the regulation in question. However, the issue before the Court is sufficiently clear that none is needed. The Court finds that the 29 U.S.C. § 1002(2)(a) (ii) is silent on whether the deferral of bonus compensation must be systematic or not in order for a plan to be a pension plan. Therefore, it was appropriate for the Department of Labor to promulgate a regulation answering the question and the Court must now decide whether the regulation is a permissible construction of the statute.
This is likely because, for reasons discussed below, the validity of the regulation plaintiff challenges has not been called into doubt.
At first blush, it might seem that the regulation runs afoul of the statutory language it interprets. This is because ERISA is intended to be broadly interpreted to protect worker's rights. See generally In re Southern Star Foods, Inc., 144 F.3d 712 (10th Cir.), cert. denied sub nom, State Ins. Fund v. Mather, 525 U.S. 978, 119 S.Ct. 438, 142 L.Ed.2d 357 (1998). Plaintiff contends that the challenged regulation is inconsistent with a broad interpretation of ERISA because it limits ERISA's coverage by excluding plans such as the one created by defendant. However, for two reasons plaintiff's argument fails.
First, the provision of ERISA in question was designed to protect worker's rights in pension and retirement plans. The regulation separates plans that are clearly intended as bonus plans from pension plans. This is not inconsistent with the statute.
Second, for reasons pointed out by defendant, invalidating the regulation, though it might help the plaintiff in this particular case, would actually have the effect of hurting workers overall. Certainly, is not consistent with the intent of ERISA. Plaintiff set up its plan to award incentive bonuses based on stock performance over a five-year period. Generously, it allowed an exception for earlier payments if an employee died or retired. If including these exceptions placed the plan under ERISA so that it was subject to vesting requirements, employers in the future would not include such provisions and employees who died or retired prior to the payment date would be financially harmed. This scenario makes it plain that by allowing plans such as defendant's to exist outside ERISA's vesting requirements, the regulation is in harmony with the broad aim of improving employee benefit plans and does not conflict with the section of the statute that it interprets. Therefore, the regulation should be upheld, the Plan is not a pension plan for ERISA purposes, and defendant's motion to dismiss should be granted.
Defendant also seeks dismissal on the ground that if the Plan is considered a pension plan under ERISA, it is still exempt from the vesting requirements because it is a "top hat" plan, i.e. an unfunded plan reserved for only a select group of management or highly compensated employees. See 29 U.S.C. § 1051(2). Due to the language of the plan and the small list of participants, it appears that this argument is likely correct. However, the Court cannot say that it is beyond doubt that plaintiff could not show a set of facts under which he could win this argument. For instance, plaintiff could show that defendant had only a few employees overall or that, despite being considered someone in a position to affect the company's performance, he was not part of a select group of management or highly compensated employees. This seems unlikely, but it is not beyond doubt. Because the Court would need more evidence to make a final decision on the issue, it is not an issue that can be ruled on in a motion to dismiss.
In addition to failing on its face, plaintiff's argument also fails because, even if the regulation were invalidated, the Plan is still not a pension plan under the plain language of the statute. As discussed previously, the purpose of the Plan is not to provide retirement income or a pension. It is nothing more than a complicated and formalized method for figuring incentive bonuses for a few key members of a business. Further, the Plan defers payments for five years, not beyond the termination of employment. It merely allows earlier payments when retirement or death frustrates the intent of the Plan. Circumstances, not the Plan, result in deferral beyond employment in these instances.
The Court notes that it is really only the challenged regulation that even suggests that something designed as a bonus plan could ever be considered a pension plan under the statute.
IT IS THEREFORE RECOMMENDED that defendant's motion to dismiss (docket no. 2) be granted and that Judgment be entered dismissing this action.