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Employee Benefits Security Administration

Advisory Opinion

December 6, 2002

Ms. Jane O. Francis
Holland & Hart LLP
P.O. Box 8749
Denver, Colorado 80201-8749

2002-13A
ERISA Sec. 3(2)

Dear Ms. Francis:

This is in response to your request on behalf of Kaiser-Hill Company, LLC (Kaiser-Hill or Company) for an advisory opinion from the Department of Labor (Department) regarding the applicability of the Employee Retirement Income Security Act of 1974, as amended (ERISA). Specifically, you asked whether the Kaiser-Hill Employee Incentive Compensation Plan (ECOMP) and the Kaiser-Hill Incentive Compensation Plan for Executives and Manager Staff (EICP), collectively (Plans), are “pension plans” within the meaning of section 3(2)(A) of Title I of ERISA, and, if the Plans should be considered pension plans, whether they are so-called “top hat” plans under ERISA sections 201(2), 301(a)(3), and 401(a)(1).

In connection with your request, you represent the following. Kaiser-Hill is a joint venture formed for the purpose of engaging in a project to safely close the Rocky Flats nuclear waste site under the terms of a multi-year contract (Contract) with the U.S. Department of Energy (DOE). Duties under the Contract are undertaken in stages and are planned and performed by workers with specialized expertise and training. Under the Contract, the Company’s earnings are dependent on the safe closure of the project site within set cost and schedule parameters. The Company has the potential to earn a substantial incentive payment if the project is completed safely, on time and certain cost savings are realized.(1)  The incentive payment declines on a sliding scale, and beyond a certain date and/or above a certain cost, no incentive payment will be earned. Quarterly progress payments will be made to the Company; however, an incentive payment is neither earned nor paid to the Company until the DOE determines that the project is complete.

The Company believes its ability to earn an incentive payment will largely depend upon motivating and retaining skilled employees. Accordingly, in 2001 the Company established the ECOMP and the EICP to share any incentive payment with eligible employees. The ECOMP is available to all salaried non-union employees and the EICP is available to an identified group of managers and officers; however, no employee may participate in both. Each of the Plans consists of two incentive components--an annual cash payment and a contingent component. In February of each year, unless changed by the Company’s Board of Managers, a $9,000,000 bonus pool for the ECOMP Plan and an $8,000,000 bonus pool for the EICP Plan are established to reward the employees’ Contract related performance during the prior calendar year. The Plans award amounts to participants based upon their contributions to: (1) safety, (2) efficient and timely mission earned-value accomplishment, (3) contribution to the Company’s reputation, (4) future potential with the Company, and (5) other extraordinary efforts. The cash component of the award is paid immediately and is approximately 20% of the total award for the EICP and 30% of the total award for the ECOMP. Under both Plans the remainder is awarded in Safe Accelerated Focused Execution Units (SAFE Units).

When a SAFE Unit is awarded, both its value and the date it may be converted to cash are indeterminate. If the Company earns and receives an incentive payment under the Contract, it will convert the participants’ earned SAFE Units to cash and make cash distributions at that time; otherwise SAFE Units will be worthless. Under the Plans, the cash conversion value of a SAFE Unit is determined when the Contract ends. The maximum value of a SAFE Unit is $1.00, based upon maximum fee and cost savings as well as an early completion date of December 15, 2005; the minimum value is zero. In years 2000 and 2001, the Company calculated the projected value of a SAFE Unit at the Contract’s end to be zero and $0.55, respectively. Under both Plans, the DOE incentive payments, if any, will be the sole source of funds used to convert SAFE Units to cash. SAFE Units awarded to participants are subject to forfeiture if the participant: (1) voluntarily terminates employment with the Company, (2) is terminated “for cause,” or (3) fails to provide a current address to the Company within a certain time period after notification, or attempted notification, that SAFE Units are eligible to be converted to cash. A participant’s death, normal retirement under the Company’s other tax-qualified retirement plans, or transfer to an affiliate is not considered a voluntary termination. Unless forfeited, a participant retains SAFE Units previously awarded and any earned for the year employment terminates. SAFE Units are nontransferable and the Company reserves the right to amend, modify, or terminate the Plans.

The Company’s workforce size and composition will fluctuate over the term of the Contract and workers will be subject to periodic reductions-in-force as the Contract work progresses. In addition, some participants may be eligible for retirement prior to or at the time the Contract is completed. Although the Company is actively seeking new projects with the intention of remaining in operation after the Contract is completed, the Company has yet to secure additional work. To the extent the dearth of projects continues, this raises the possibility that many employees may terminate employment prior to receiving any SAFE Unit payments that may become due at the end of the Contract. The Company, however, anticipates that, even absent additional projects, some employees will be able to continue employment with the Company or its affiliates.

Section 3(2)(A) of ERISA provides, in relevant part, that the term “pension plan” includes any plan, fund, or program established or maintained by an employer to the extent that by its express terms or as a result of surrounding circumstances such plan, fund or program provides retirement income to employees or results in a deferral of income by employees for periods extending to the termination of covered employment or beyond. The Department’s regulation at 29 C.F.R. 2510.3-2 describes certain arrangements which will not be considered to constitute an employee pension benefit plan within the meaning of section 3(2) of Title I of ERISA. With respect to bonus programs, paragraph (c) of the regulation provides:

For purposes of Title I of [ERISA], the term . . . “pension plan” shall not include payments made by an employer to some or all of its employees as bonuses for work performed, unless such payments are systematically deferred to the termination of covered employment or beyond, or so as to provide retirement income to employees.

29 C.F.R. § 2510.3-2(c).

Neither the ECOMP nor the EICP expressly condition distribution of any of the bonus payments on termination of employment or retirement. Accordingly, the Plans are not by their express terms employee pension benefit plans.(2)  Approximately 20% to 30% of the Plans’ awards are paid immediately in cash each year. Payment on the SAFE Units is delayed in this case only because the value of the SAFE Units is contingent upon the Company earning an incentive payment under the DOE Contract, and that value (which could ultimately be zero) cannot be determined prior to the Contract’s end. Even with this delay, some participants are expected to receive cash for their SAFE Units while still in covered employment. Further, the Plans provide for forfeiture of SAFE Units by participants who voluntarily terminate employment during the term of the Contract except for death, normal retirement, or transfer to an affiliate. Under these circumstances, the mere fact that many of the Plans’ participants may have separated from the Company prior to the completion of the Contract, and prior to the time they will be eligible to convert SAFE Units to cash, does not, in the Department’s view, implicate a deferral of income of the kind contemplated by section 3(2)(A) of ERISA or a systematic deferral of payments to the termination of covered employment or beyond that would preclude the ECOMP and EICP from being bonus programs within the meaning of 29 C.F.R. § 2510.3-2(c).

You should be aware that, under section 3(2)(A) of ERISA, the ECOMP and EICP may, nevertheless, be employee pension benefit plans if they provide retirement income to employees as a result of surrounding circumstances.(3)  This question is inherently factual in nature and generally the Department does not issue advisory opinions on such questions. See Section 5.01 of ERISA Procedure 76-1, 41 Fed. Reg. 36281 (Aug. 27, 1976). We, however, have no reason to believe, based upon the representations in your submission, that the Plans would be pension plans as a result of such surrounding circumstances.

You have also requested that the Department consider whether the Plans are so-called “top hat” plans under sections 201(2), 301(a)(3), and 401(a)(1) of ERISA. Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA, generally referred to as “top hat” plan provisions, apply to “a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.” Because we do not find, based upon your representations, that either the ECOMP or EICP is by its express terms a pension plan, it is unnecessary to address this issue.

This letter constitutes an advisory opinion under ERISA Procedure 76-1 and is issued subject to the provisions of that procedure, including section 10 thereof relating to the effect of an advisory opinion.

Sincerely,
John J. Canary
Chief, Division of Coverage, Reporting & Disclosure
Office of Regulations and Interpretations

Footnotes

  1. The Contract commenced on February 1, 2000, and contains certain maximum cost targets and a target project completion date of December 15, 2006. The Contract provides for incentive payments to the Company that depend on whether actual costs are less than target costs and project completion is on time or accelerated.

  2. From the information submitted, there is no indication that the Plans are employee welfare benefit plans within the meaning of ERISA section 3(1). The Plans were not established and are not maintained for the purpose of providing severance, unemployment or any of the other benefits described in that section.

  3. For example, in the instant case, a significant factor would be whether in determining amounts awarded or employees selected to receive awards, the economic benefits under the Plans are disproportionately allocated to participants either at or near retirement age so as to provide retirement income.