Human Capital & Careers

Court Rules Company Can Terminate Supplemental Benefits

Pep Boys' "top hat" pension plan ruled valid and enforceable.
Stephen TaubJuly 10, 2001

The U.S. District Court for the Eastern District of Pennsylvania ruled that a company can terminate a former executive’s supplemental pension benefits once the former employee engages in competitive business.

In Bryan vs. The Pep Boys-Manny, Moe and Jack, U.S. District Judge Herbert J. Hutton held that the forfeiture clause in The Pep Boys’ “Top Hat” pension plan is valid and enforceable, dismissing the plaintiff’s ERISA, contract, and estoppel claims.

In 1991, The Pep Boys hired James Bryan for an executive position. Although he signed a term sheet acknowledging that he understood the terms of the company’s Executive Supplemental Pension Plan, Bryan claimed that, at the time of his hiring, he was not informed of the forfeiture provision in the Plan.

Bryan said that only upon his retirement–seven years later–was he informed that his benefits would terminate were he to consult for, or work with, a competing business. Bryan elected to accept early retirement benefits under the Plan and received monthly payments from March 1998 until June 1999, at which time he accepted a consulting position with Midas, a competitor of The Pep Boys.

Upon learning of Bryan’s new position, The Pep Boys enforced the forfeiture clause in the Plan and terminated all Top Hat benefit payments to Bryan. Bryan initiated an internal administrative appeal, which was turned down by the Plan Administrator.

In rejecting the plaintiff’s claim that his payments should continue because he was unaware of the forfeiture provision at the time he was hired, Judge Hutton wrote: “Because plaintiff has accepted certain provisions of defendant’s supplemental executive benefits plan, the court finds that plaintiff cannot now renounce other provisions of defendant’s plan.” Additionally, Judge Hutton held that The Pep Boys had acted in accordance with ERISA disclosure requirements for Top Hat plans by timely filing a statement with the U.S. Department of Labor delineating the terms of its plan.

The company was therefore under no legal obligation to offer a summary of the Plan to participants as would be required under ERISA for broadly-based pension plans.

The court also ruled that the forfeiture provision did not run afoul of federal public policy, nor was it unenforceable because it was unlimited in scope and time. The court noted that Top Hat plans are exempt from many of ERISA’s provisions, including those providing “nonforfeitability protection.”

Judge Hutton found that this exemption for Top Hat plans was created deliberately “to let executives use their positions of power to negotiate such protection for their plans on their own.” Accordingly, the court refused to “rewrite the federal statute” and granted The Pep Boys summary judgment on all counts.

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