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 that 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.
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]
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.
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repealed the 2005 amendment and essentially reinstated the policy that
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.