ERISA-Ninth Circuit Rules That A Stock Rights Plan Is Not Subject To ERISA

The case of Rich v. Shrader, No. 14-55484 (9th Cir. 2016), involves, among other things, an employer’s Stock Rights Plan (the “SRP”). The question arose as to whether the SRP is subject to ERISA.

The SRP operated in the following manner: The employer granted eligible employees the right to purchase employer stock at such times, in such amounts and to such employees as determined in the “sole discretion” of the employer’s Board of Directors. The receiving employee was required to exercise the stock rights within sixty days of the grant by, among other things, purchasing ten percent of the stock rights. On June 15 of each subsequent year, the employee would have the opportunity to purchase another ten percent of the initial grant of stock rights. In the event the employee failed to exercise the rights within sixty days of the initial grant or each June 15, all unexercised rights that the employee may have would be forfeited. Although SRP participants were expected to hold their shares until they leave the firm, they were not precluded from selling paid-up stock back to the employer at any time. Shares earned through the SRP increased in value ten percent annually. In the event an SRP participant ceased being an employee of the employer by virtue of retirement, disability, or death, the employer had the right to repurchase that employee’s shares within twenty-four months after the end of his or her employment.

The Ninth Circuit Court of Appeals (the “Court”) said that ERISA coverage extends to employee pension benefit plans. A plan qualifies as an employee pension benefit plan if by its express terms or as a result of surrounding circumstances such plan: (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 (29 U.S.C. § 1002(2)(A)).The paramount consideration is whether the primary purpose of the plan is to provide deferred compensation or other retirement benefits.

The main purpose of the SRP was not to provide retirement or systematically deferred income. The SRP states that its purpose is to provide incentives for company Officers to continue to serve as employees of the company and its subsidiaries. A certain memorandum explained that the stock program’s purpose is to provide for the Firm’s capital needs. Stock is not intended to be—and is not viewed by the Board as in fact being—an alternate form of compensation. With respect to retirement income, the employer had communicated that the SRP should not be viewed principally as an estate building vehicle since equity returns will be modest. Liquidation of stock at retirement is a return of capital rather than a source of retirement income.

As such, the Court concluded that, because the SRP was not designed or intended to provide retirement or deferred income, it is not covered by ERISA.

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