Option Plan Given As Incentive Is Not an ERISA Plan

April 16, 2003 (PLANSPONSOR.com) - An employer's incentive-based stock option plan is not an ERISA plan since its purpose was to provide current, rather than, retirement income.

>The US 3rd Court of Appeals made the ruling in Oatway versus American International Group Inc (AIG) based on its determination that AIG provided selected employees with the option to purchase shares of the company’s common stock, with exercise limits in the event of employment termination prior to normal retirement age. Thus, the options were not deferred income, but were incentive bonuses, providing key employees with “an additional incentive to continue their efforts” on behalf of the company, according to Washington-based legal publisher BNA.

Incentive Options

>Derek Oatway retired in 1992, prior to reaching normal retirement age. Oatway alleged that the company agreed that he could exercise his options over a 10-year period, instead of within three months as required under the plan in the event that employment is terminated outside of the bounds of a normal retirement age.

>When Oatway attempted to exercise his options in October 2000, the company refused.   Oatway sued alleging the company violated ERISA and its fiduciary duties by denying his request to exercise the options.

>The US District Court for the District of Delaware dismissed Oatway’s action because of his failure to state a claim under ERISA.   In dismissing the case, the lower court determined that the stock option plan was not an ERISA-governed plan, because it was designed to provide current rather than retirement income to employees.   Thus Oatway had no cause of action under the federal statute.  

>The appeals court affirmed the district court’s ruling, saying the issue was whether the stock options were given as incentive bonuses to continue employment or as deferred compensation arrangements subject to ERISA. The appeals court based its finding on the district court’s application of the legal analysis in Murphy v. Inexco Oil Co.

>In the Murphy case, the US 5th Circuit Court of Appeals found that an employer’s bonus program was not an ERISA plan because it was designed to provide current rather than retirement income to employees. Agreeing with the analysis in Murphy and with the “unbroken line of cases that have followed Murphy’s reasoning,” the appeals court said “here, Oatway’s stock options were discretionary, given in recognition of special service, and awarded in addition to his regular compensation…they did not result in the deferral of income even though they could be exercised after he retired.”

The case is Oatway v. American International Group Inc., 3d Cir., No. 02-1699, 4/14/03.