Forcing Terminated Participants out of Company Stock no ERISA Violation

March 2, 2010 (PLANSPONSOR.com) – A federal court has ruled that an Employee Stock Ownership Plan sponsor did not breach its fiduciary duties by amending the plan to force terminated employees out of company stock investments.

The U.S. District Court for the District of North Dakota found that the 2006 amendments to the Tharaldson Motels Inc. Stock Ownership Plan were permitted under the terms of the plan and the Employee Retirement Income Security Act (ERISA). Chief Judge Ralph R. Erickson said in his opinion that an employer offering a plan which provides terminating participants a single sum distribution in employer stock "may modify the plan to provide the equivalent distribution in cash without violation of the anti-cutback provisions" of ERISA.

According to Erickson, the finding is supported by the comments at the time the regulations were under consideration by the Department of the Treasury, which note that it has become easier for individuals to replicate the various payment choices available from qualified plans through other means, such as a rollover to an IRA, and that requiring a plan to continue to offer all existing payment options – such as keeping company stock in the plan - "often imposes significant administrative burdens that are disproportionate to any corresponding benefit to [plan] participants."

Finally, Erickson said the expectation of the plaintiffs, that the TMI stock would increase in value should TMI be sold, is not an accrued benefit, but rather an expectation not covered by the anti-cutback rule. "The 2006 Amendment is permitted by law and the cash out option to departing employees protected their accrued benefits under the Plan," Erickson concluded.

While the ESOP's 2002 document was silent as to whether employees terminating employment were required to liquidate their shares and cash out of the plan, prior to 2005, a plan participant whose employment with TMI ended was permitted by the ESOP Committee to elect either a cash distribution of their account or a re-investment in a stable value account.

In 2005, the plan was amended to allow departing participants to retain their accounts in TMI stock, but a subsequent amendment in 2006 repealed the 2005 amendment and essentially reinstated the policy that existed prior.

The plaintiffs alleged that this change was not publicized, except to departed TMI employees, and that while they learned of the 2005 change shortly after its adoption, they had not learned of the 2006 change until 2008. In addition, they claimed that because of the requirement to divest the stock, a plan participant would lose the potential appreciation in TMI in years to come should the plan elect to sell the shares to some third-party.

The plaintiffs asked to have the 2006 amendment invalidated.

The case is Hoffman v. Tharaldson Motels Inc. Employee Stock Ownership Plan, D.N.D., No. 3:08-cv-109, 2/26/10.

Rebecca Moore
editors@plansponsor.com