One issue that sometimes arises when drafting a nonqualified plan document (or qualified plan for that matter) is how to define a “participant” in the plan. Typically, a plan will define “participant” broadly to include anyone who has an account balance or an accrued benefit under the plan and who has yet to be paid his or her complete benefit. This broad definition includes both active employees who generally are accruing additional benefits as well as former employees who no longer are accruing benefits but still are entitled to payments under the plan. Sometimes, however, an employer may not think in broad terms and instead want to use the term “participant” interchangeably with “employee.” Although courts typically show a certain measure of deference to employers in how they interpret their plans, a recent Second Circuit decision (Gill v. Bausch & Lomb, 14-1058, 2d Cir. 2014) reminds us that plan administrators should not get too carried away with relying on administrative discretion and should be mindful of the specific terms they use to define a participant.
Case Background
Bausch & Lomb (the “Company”) maintained a nonqualified deferred compensation plan (the “Plan”) that covered three retired executives. The Plan contained a change of control provision, pursuant to which a “participant’s” benefit would be converted to a cash lump-sum and paid within 15 days following a change in control of the Company. The applicable provision expressly referred only to “participants.” This latter point proved to be important because the Plan contained definitions of both “participants” and “retired participants.” In May 2007, a private equity firm acquired all of the outstanding shares of the Company, which triggered the change in control payments under the Plan. After the change in control, the Company’s Compensation Committee instructed the Plan’s trustee not only to provide lump sum payments to active participants but also to discontinue installment and annuity payments to the “retired participants” and instead pay them any remaining benefits in a lump sum as well.
The retired participants cried foul, in part because they alleged that the lump sum payments had actuarial values that were less than the actuarial equivalent of their remaining monthly benefits. They brought suit, alleging that the termination of the monthly benefits and the payment of the reduced lump-sum violated ERISA. The district court held that the Plan prohibited the cancellation of monthly benefits for retirees. The court allowed the retirees to retain the lump-sum payments they previously received and ordered the reinstatement of the monthly benefits to the retired participants, albeit at a lesser amount to reflect the lump sum payment the participants retained. The Second Circuit affirmed.
Interpretation of the Plan’s Defined Terms
The appeals court’s decision relied on the plain language of the Plan. The Company had tried to argue that retired participants should be viewed as a “subset” of participants, and thus subject to the lump sum cash-out provision upon a change in control. In fact, many employers often view “participants” as covering both active employees as well as former employees or retirees who have not received full payment under the plan. The court rejected the Company’s argument, however, stating that the Plan clearly defined a “participant” as an active employee and a “retired participant” as a retiree. Even if the Company never intended to distinguish active and former employees in this manner, the court concluded it could not ignore the clear text of the Plan. The plain text clearly defined retirees as not being “participants” under the Plan. Because of that, the Company could not cash out their benefits upon a change in control.
Lessons
The lesson from the case is a straightforward one. It may be easy to think of “participants” interchangeably with employees, but it is important for employers to remember that until a final payment is made under a plan, former employees have rights under a plan too. Consequently, employers should be mindful of how a plan is designed to treat both active and former employees.
