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Ms. Jane O. Francis
Holland & Hart LLP
P.O. Box 8749
Denver, Colorado 80201-8749
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2002-13A
ERISA Sec. 3(2)
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Dear Ms. Francis:
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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).
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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.
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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).
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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.
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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.
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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.
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29 C.F.R. § 2510.3-2(c).
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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).
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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.
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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.
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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.
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Sincerely,
John J. Canary
Chief, Division of Coverage, Reporting & Disclosure
Office of Regulations and Interpretations
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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.
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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.
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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.
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