The One Big Beautiful Bill Act signed into law on July 4, 2025, makes significant changes to the tax treatment of the sale of Qualified Small Business Stock (QSBS).  These changes make it easier for individual owners of QSBS to exclude gain from the sale of such stock from federal income tax.  This article examines these changes. 

Qualified Small Business.  The law changes the definition of Qualified Small Business (QSB) by increasing the limit on the amount of assets the corporation can have before and after the issuance of the stock to be a QSB.  The law still requires that the corporation be a C corporation when the stock is issued.  Prior to July 4, 2025, the corporation could not have gross assets exceeding $50 million before and after the issuance of the stock to be a QSB.  For stock issued on or after July 4, 2025, this limit is increased to $75 million.  Therefore, more small businesses will qualify.  However, certain types of businesses are still excluded from being QSBs.  These include:  health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its owners or employees; any banking, insurance, financing, leasing, investing, or similar business; any farming business; any mining or oil and gas business; and any business operating a hotel, motel, restaurant or similar business.

Shorter Holding Period for Exclusion.  Prior to July 4, 2025, an individual shareholder holding QSBS must have held it for at least 5 full years to exclude the gain on the sale of the stock from income tax.  For stock issued on or after July 4, 2025, there is a partial exclusion of the gain if the stock is held for at least 3 years.  If the stock is held for 3 years but less than 4 years, 50% of the gain on the sale of the stock may be excluded from income tax.  If the QSBS is held for 4 years but less than 5 years, 75% of the gain from the sale of the stock may be excluded from income tax.  If the individual holds the stock for at least 5 years, 100% of the gain from the sale can be excluded. 

This change allows individual investors to sell the stock before 5 years and still receive some tax benefit.  This gives flexibility to QSBS investors who may wish to exit the investment sooner to invest in another opportunity or to free up cash.

Exclusion Limit Increased.  Prior to July 4, 2025, there was an individual limit on the amount of gain that could be excluded from tax by the individual investor.  The limit was the lesser of:  Ten times the individual’s adjusted basis in the investment; or $10 million ($5 million if married filing separate).  On or after July 4, 2025, the dollar limit of the equation is raised to $15 million ($10 million if married filing separate).  This ensures that more individuals will be able to exclude more gain. Conclusion.  These changes are very beneficial to individual investors.  It is important to note that only individuals are eligible for the exclusion and not entity investors.  It is likely that founders of businesses will be best able to take advantage of these changes.  However, individual angel investors will also benefit.

On January 26, the IRS issued Notice 2026-9 (Notice) which further extended the deadline for Individual Retirement Accounts (IRAs) and Simplified Employee Pensions (SEPs) to be amended to comply with changes in the law under recent legislation known as SECURE 2.0, SECURE Act, CARES Act, and The Taxpayer Certainty and Disaster Tax Relief Act of 2020. The deadline was December 31, 2026, but the Notice has extended it to December 31, 2027. The IRS stated the reason for the change was the fact that stakeholders provided feedback that without model amendments, they would need more time to implement the changes. The IRS is still developing model amendments. Therefore, it extended the deadline.

Second Extension. SECURE 2.0 was enacted in late 2022 and extended the deadline for these amendments to the end of 2025. However, in late 2023, the IRS issued Notice 2024-02 which extended the deadline to the end of 2026 for most plans. See, Notice 2024-02 Extends Deadline For SECURE 2.0 Amendments And Provides Other Guidance. The 457(b) plans of tax exempt organizations were excluded from this extension though, meaning the end of 2025 deadline still applied to these plans. See, Tax Exempt Organizations Sponsoring 457(b) Plans Must Amend Plans by Year-End.

Only IRAs and SEPs. This new extension does not apply to qualified plans, 403(b) plans, or 457(b) plans of state and local governments. The deadline for their amendments remain December 31, 2026, with certain exceptions for collectively bargained and governmental plans.

Conclusion. This additional extension shows the IRS can be flexible on certain matters. However, issuing the Notice was a golden opportunity to also extend the deadline for 457(b) plans sponsored by tax exempt organizations whose deadline of December 31, 2025, has already passed. The failure of the Notice to address this signifies that there will be no further extension for such plans. However, depending on the plan’s terms and operation missing the deadline may not cause adverse tax consequences. Any tax exempt organization that missed the deadline should consult legal counsel immediately.

Late on November 12, 2025, President Trump signed legislation to re-open the federal government and keep it open through January of next year, ending the longest government shutdown in United States history. On November 13, the IRS issued Notice 2025-67 containing all the inflation adjusted numbers for employee benefit plans for 2026. This was later than usual due to the shutdown. Among the adjustments is an adjustment to the compensation threshold for an individual being considered a high-earner whose catch-up contributions, if any, must be made on a Roth after-tax basis beginning next year (Roth catch-up threshold).

Standard Catch-Up. Most 401(k), 403(b), and governmental 457(b) plans may allow employees age 50 and over to electively defer an additional “catch-up” amount from salary to their plan. The idea is that participants who may not have contributed the maximum when they were younger can catch-up with these additional contributions before retiring. For 2025, the standard catch-up amount was $7,500. This amount is adjusted annually for inflation and for 2026 is $8,000.

Roth Catch-Up Threshold. The legislation known as SECURE 2.0 provides that certain “high earners” that make a threshold amount of compensation and want to make catch-up contributions must make them on a Roth basis. The original threshold of compensation was set at $145,000 in FICA compensation on a look-back basis. The legislation provides the rule is effective for years beginning after 2023. However, the IRS provided for a two-year administrative adjustment period until years after 2025, essentially saying pre-tax catch-up contributions for high earners during the period would be considered to meet the Roth requirement.

The Roth catch-up threshold has been adjusted from $145,000 to $150,000 for 2026. It was unclear if the threshold would be adjusted since 2026 is the first year that it is being enforced. What this means is that if an employee had 2025 compensation considered wages for Social Security and Medicare tax purposes (Form W-2, Box 3) that exceeded $150,000 from an employer, that employee would only be able to make catch-up contributions on a Roth basis in 2026 in that employer’s plan. It is important to note that this threshold for being a “high earner” for purposes of catch-up contributions is different from the threshold for being a “highly compensated employee” for various nondiscrimination provisions. That threshold for 2026 remained the same as for 2025 at $160,000. Thus, an individual with $160,000 in compensation in 2025 will be a highly compensated employee in 2026, and the same will be true for 2027, if they meet the threshold in 2026.

Super Catch-Up Stays the Same. SECURE 2.0 also created a “super catch-up” provision, permitting a larger amount of catch-up contributions for participants attaining ages 60, 61, 62, or 63 during the year. SECURE 2.0 set the 2025 super catch-up limit at 150% of the standard $7,500 catch-up contribution limit from 2024, making it $11,250. From 2026 forward, the legislation requires the IRS to index the $11,250 amount for cost-of-living adjustments. As a result, in 2026, the super catch-up threshold remains $11,250.

Other Limits. The Notice also includes adjustments for other limits. The amount that can be electively deferred under Code section 402(g) is increased from $23,500 to $24,500, as is the annual contribution limit for 457(b) plans. The 415 limit for defined contribution plans increased from $70,000 to $72,000. The 415 limit for defined benefit plans increased from $280,000 to $290,000. And the limit on annual compensation that can be considered under a qualified plan under Code section 401(a)(17) was raised from $350,000 to $360,000. There are other adjustments set forth in the Notice, as well.

Conclusion. These adjustments are welcome and necessary guidance. The IRS should be commended for getting the Notice out so quickly after the shutdown ended. In particular, the guidance on the adjustment to the Roth catch-up threshold was needed for employers who need to implement the rules beginning next year.

On October 28, 2025, former Morgan Stanley financial advisers filed suit against the United States Department of Labor (DOL), challenging the propriety of Advisory Opinion 2025-03A (Opinion) in Sheresky et al v. United States of America et al. The DOL Opinion opined the Morgan Stanley Compensation Incentive Plan was a bonus program exempt from ERISA. See EBSA Agrees Morgan Stanley Deferred Compensation Plan Is Not Subject to ERISA–Is Bonus Program. The suit alleges that the DOL exceeded its regulatory authority and acted arbitrarily and capriciously by: creating and applying an impermissible “purpose test” for determining whether a plan is a pension plan; incorrectly relying on an invalid regulation regarding bonus plans; failing to follow its own procedures regarding advisory opinions; and ignoring contradictory case law.

Purpose Test. The complaint states that the Opinion used a purpose test and determined that the plan’s purposes were to provide bonuses and not retirement income, when case law requires an examination of whether the plan has the effect of deferring income to termination of employment or beyond.

Bonus Regulation. The bonus regulation requires that not only must a plan result in a deferral of income for periods extending to termination of employment or beyond, as provided by the words of ERISA, but adds an additonal requirement that the deferral be “systematic”. 29 C.F.R. 2510.3-2(c). The complaint alleges the DOL had no authority for adding this additional element and the regulation should be held invalid.

Advisory Opinion Procedures. The complaint further alleges the DOL violated its own advisory opinion procedures set forth in ERISA Procedure 76-1.  Those procedures state that advisory opinions will generally only be issued with respect to prospective transactions.    Yet, plaintiff’s allege the Opinion was applied to years 2015-2021. Plaintiffs also cite the DOL’s website as stating the DOL does not issue advisory opinions for use in any investigation or litigation matter existing before the request for the opinion. 

Ignoring Precedent. The plaintiff’s further allege the DOL disregarded binding case law, citing two cases decided by the same New York district court where the suit was filed, holding the Morgan Stanley plans were governed by ERISA. The complaint also cites the Fifth Circuit case of Tolbert v. RBC Capital Markets Corp., 758 F. 3d 619 (5th Cir. 2014), as finding a similar plan was subject to ERISA.

Stay Tuned. It will be a while before the case is decided, however, it is not unforeseeable that the court that previously held that the Morgan Stanley plan is subject to ERISA will invalidate the Opinion holding it is not. Meanwhile, pending before the United States Court of Appeals for the Fourth Circuit is the appeal of the district court case involving Merrill Lynch’s deferred compensation plan where the lower court found that the plan was an exempt bonus program with similar reasoning as the Opinion, including an examination of the purposes of the plan. The Appellees in that case cite some of the same arguments as the plaintiffs in the Morgan Stanley case. The Opinion is not binding on any court but only persuasive authority of how the agency charged with ERISA enforcement applies the law to the facts. Therefore, the Fourth Circuit may or may not find the reasoning of the DOL persuasive.

Most tax-advantaged retirement plans have at least until the end of 2026 to adopt amendments required by the legislation known as SECURE and SECURE 2.0. However, tax exempt organizations are different when it comes to 457(b) plans. This is because such plans were neglected and excluded from the IRS Notice that extended the amendment deadline for other plans and governmental sponsors of 457(b) plans from the end of 2025 to the end of 2026. When the age to begin Required Minimum Distributions (RMDs) was raised from 70 1/2 to 72 under the SECURE legislation, most retirement plans had to be amended by the end of 2022. However, the IRS extended the deadlines to the end of 2025 for most plans pursuant to IRS Notices. These extensions did not apply to tax exempt organization’s sponsoring 457(b) plans (Tax Exempt 457(b) Plans). See, Tax Exempt Organizations Must Amend 457(b) Plans By December 31 For Increased RMD Age. The legislation known as SECURE 2.0 extended the RMD age again and conformed the prior deadline for amendments with the deadline for most SECURE 2.0 provisions to the end of 2025. This included extending the deadline for Tax Exempt 457(b) Plans. See, SECURE 2.0 Changes Specific to Plans of Tax-Exempt Organizations. However, in late 2023, the IRS issued Notice 2024-02 which extended the deadline to the end of 2026 for most plans. See, Notice 2024-02 Extends Deadline For SECURE 2.0 Amendments And Provides Other Guidance. Unfortunately, once again Tax Exempt 457(b) Plans were left out, meaning the end of 2025 deadline still applies.

Thus, Tax Exempt 457(b) Plans must be amended by the end of this year for the new RMD ages and it doesn’t appear there will be any further extensions. If your Tax Exempt 457(b) Plan needs amending, please contact us.

Some people are under the impression, and several articles have indicated, that the final Roth catch-up regulations issued on September 14, 2025 extended the deadline for complying with the Roth catch-up rules. This is not true.

Final Regulations. The final regulations are effective for taxable years beginning after December 31, 2026. However, this does not mean that the requirement that the catch-up contributions of high earners must be Roth contributions has been delayed to that date. The statutory effective date for Roth catch-ups under SECURE 2.0 is taxable years beginning after December 31, 2023. However, in August of 2023, the IRS issued Notice 2023-62 which announced a 2-year administrative transition period (until taxable years beginning after December 31, 2025) to facilitate an orderly transition for compliance with the requirement. During the transition period, the catch-up contributions of high earner participants subject to the Roth requirement are treated as satisfying the Roth requirement even if made on a pre-tax basis.

Administrative Transition Period Not Extended. The final regulations specifically state in the Preamble that they do not extend or modify the administrative transition period. Instead, under the Applicability date section, the regulations state, “. . . this section applies to contributions in taxable years beginning after December 31, 2026. For prior taxable years, a reasonable, good faith interpretation standard applies . . .” Also a plan is permitted to apply the rules of the final regulations in any taxable year beginning after December 31, 2023.

Conclusion. Thus, the administrative transition period ends on December 31, 2025. Thereafter, employers must comply with the Roth catch-up requirement on a reasonable, good faith basis. Compliance with the final regulations prior to their effective date would meet the reasonable, good faith standard. However, not complying with the Roth catch-up requirement in 2026 would not be considered reasonable, good faith compliance.

The final regulations contain much more content other than the applicability date. This article is intended to clear up the confusion over when the Roth catch-up requirement applies. Watch for a more detailed article by my colleague Kevin Nolt in the Trucker Huss Benefits Report coming soon.

On September 9, 2025, the Employee Benefits Security Administration (EBSA) issued Advisory Opinion 2025-03A to Morgan Stanley Smith Barney LLC (Morgan) regarding the status of its Deferred Incentive Compensation Plan (Plan) which is at issue in several cases being arbitrated and litigated. EBSA opined that the Plan is not a “pension benefit plan” as defined under Title I of ERISA, but rather is a bonus program exempt from Title I.

Not a Retirement Plan. EBSA opined that the Plan did not by its terms or as a result of surrounding circumstances provide retirement income to participants or result in deferral of income beyond termination of employment. The Plan provided credits of stock or cash deferred compensation based on revenue generated and length of service, subject to a vesting schedule. Stock awards vested after 6 years and cash awards after 4. Only participating financial advisors who terminate employment due to death, disability, retirement, involuntary termination or government service are paid benefits after termination of employment. EBSA opined that these are not the types of surrounding circumstances that show the Plan provides retirement income.

A Bonus Program. Additionally, EBSA determined the Plan qualified as a bonus program exempt from Title I of ERISA. It found the express purpose stated in the Plan is to reward advisors for their long-term tenure and incentivize good behavior desired by Morgan. The awards were unsecured and not guaranteed, and participants were notified annually about the terms of he Plan and informed that it was not an ERISA retirement plan. Therefore, EBSA found its express purposes, design, administration and conditions on award payments supported the conclusion that the awards are bonuses.

Conclusion. There are several arbitrations and even lawsuits over the Plan which Morgan has been defending for years. In those cases, the plaintiff-advisors maintain that the Plan is subject to ERISA and violates its minimum vesting rules. Morgan has been winning many arbitrations. However, in July the United States Court of Appeals for the Second Circuit held the Plan was subject to ERISA and the plaintiff’s in the class action could go to arbitration with their claims. Shafer v. Morgan Stanley, et. al., No. 24-3141(L), 2025 WL 1890535 (2d Cir. July 9, 2025). The DOL’s Advisory Opinion gives Morgan even more ammunition to defend the arbitrations and may even chill future claims. The opinion also makes clear that a deferred compensation plan that qualifies as a bonus program is exempt from Title I of ERISA without having to be a top hat plan for a select group of management of highly compensated employees.

On July 17, the United States Court of Appeals for the Sixth Circuit upheld the district court’s dismissal of claims brought by former manager-executives of Ruby Tuesday, Inc. (Ruby), seeking recovery of lost benefits from the trustee of the rabbi trust that held the assets of two top hat plans, Regions Bank (Regions), after Ruby filed for bankruptcy. Aldridge v. Regions Bank, No. 24-5603, 2025 WL 1983483 (6th Cir. 2025). The court affirmed that the plaintiff-executive’s state law claims for breach of fiduciary duty, breach of trust, breach of contract and negligence were preempted by ERISA, even though top hat plans are exempt from ERISA’s fiduciary duties.

Top Hat Plans. To be a top hat plan, the plan must be unfunded and primarily for providing benefits to a select group of management or highly compensated employees. Such plans are exempt from ERISA’s coverage, funding, and fiduciary duty rules. Since they must be unfunded, the benefits remain subject to the employer’s general creditors.

Rabbi Trusts. A rabbi trust is an irrevocable trust that holds the assets of a top hat plan where the trustee is directed to use such assets to pay the benefits under the plan when they are due. However, if the employer becomes insolvent, all distributions of benefits must stop and the assets are held for the general creditors of the employer. Because the assets are still subject to the employer’s general creditors in the event of insolvency, the trust is still considered unfunded. Rabbi trusts are a technique to ensure that the participants will be paid their benefits as long as the employer is solvent. They are called a “rabbi” trusts because the first IRS ruling approving the technique involved a plan for a rabbi.

Background. In 2017, Ruby was acquired by another entity. The rabbi trust contained a clause that if the employer experienced a change of control, the employer was required to fully fund the trust for all benefits owed under the plans and the trustee was empowered to take any and all legal action to enforce this obligation. Plaintiffs alleged that Ruby never fully funded the trust and Regions failed to enforce this provision of the trust. Ruby’s board of directors terminated the plans on March 1, 2019 and authorized lump sum distributions of participant account balances as soon as possible after March 1, 2020 but before March 1, 2021. This is a standard procedure for voluntary termination under Internal Revenue Code section 409A. Plaintiffs alleged that Regions failed to notify participants of their right to receive a lump sum, failed to prepare to distribute the lump sums, and failed to enforce Ruby’s obligation to distribute the lump sums. Plaintiffs further alleged that Ruby orally directed Regions to suspend payments scheduled on or after August 1, 2020 which violated the terms of the Plans. On September 2, Ruby notified Regions in writing that it was insolvent, pursuant to trust provisions, and it filed a Chapter 11 bankruptcy petition on October 7, 2020.

Once Ruby filed for bankruptcy, the court ordered that Ruby and Regions liquidate the rabbi trust and turn over the assets to the bankruptcy estate. The participants in the plans then settled with the bankruptcy estate to receive a portion of the trust assets. However, many of the participants then sued Regions for their remaining benefit. In addition to the state law claims, the Plaintiffs alleged one ERISA claim for equitable surcharge for the benefits they lost.

Preemption. The Sixth Circuit found that all the state law claims were expressly preempted by ERISA because the state laws were connected to employee benefit plans. It reasoned that allowing enforcement of such state law claims would contravene ERISA’s uniform regulatory scheme.

With respect to the fact that top hat plans are exempt from ERISA’s fiduciary duties, the court said “The statutory regime shows that Congress ‘deliberately omitted’ these duties because high-level employees can protect themselves through contract. . . The preemption provision thus continues to apply to these plans even though ERISA exempts them from many rules.” It further stated that Plaintiffs cannot “use state law to put back in what Congress has taken out.”

The court also rejected the Plaintiff’s argument that they weren’t seeking to only enforce preempted state law fiduciary duties but also non-preempted contractual fiduciary duties under the trust agreement. The court stated that the Plaintiffs “. . . mistakenly seek to enforce these alleged contractual duties through an ‘alternative enforcement’ vehicle (a state-law breach-of-contract suit) rather than the vehicle that ERISA provides: a suit to enforce the terms of a plan under section 1132(a)(1)(B).” The court stated it need not decide whether top hat plan participants could enforce contractually imposed fiduciary duties on plan administrators under ERISA section 1132(a)(1)(B).

Equitable Surcharge. The appellate court also upheld the district court’s dismissal of the Plaintiff’s ERISA claim for surcharge under ERISA’s authorization for “other appropriate equitable relief” in section 1132(a)(3). The Court found that what the Plaintiffs were seeking, recovery of their lost benefits, was compensatory damages which is a legal remedy not an equitable one. The court pointed out that the Plaintiffs were not seeking money from the plan assets, which were now held by the bankruptcy estate, but from Regions’ general assets. However, courts cannot grant a monetary award under ERISA section 1132(a)(3) to compensate a plan participant for losses caused by a fiduciary. The Sixth Circuit also refused to create a federal common law cause of action as requested by the plaintiffs. It reasoned that the Supreme Court has held that courts lack any federal common law power to revise the text of the ERISA statute by creating a cause of action that Congress did not provide for in ERISA section 1132(a).

Conclusion. This case is important as it shows that the trustees of a rabbi trust holding assets of a top hat plan that turns over the assets of the trust to the bankruptcy estate of a bankrupt employer cannot be sued for prior behavior that would violate state law. Nor can the trustee be sued for recovery of lost benefits from such prior behavior under ERISA’s other appropriate equitable relief clause. However, it leaves open the question of whether a top hat participant could sue a rabbi trustee to enforce violation of plan terms under the terms of the trust agreement under ERISA for behavior occurring prior to the employer’s bankruptcy.

On July 4, President Trump signed his tax and spending bill known as the One Big, Beautiful, Bill Act (OBBA). From my perspective, one of the most important things that makes OBBA beautiful is what it doesn’t do. It doesn’t make changes to retirement plans or deferred compensation. That said, a change it does make with respect to compensation paid by tax exempt organizations triggers an important reminder regarding 457 plans of such organizations. Internal Revenue Code section 4960 (Section 4960) imposes a 21% excise tax on tax exempt organizations, with few exceptions, that pay a “covered employee” compensation over 1 million dollars in a given year (Threshold). The tax only applies to the compensation in excess of the Threshold. The tax is also imposed on any excess parachute payment to a covered employee. An excess parachute payment is basically a payment paid due to an involuntary termination that exceeds 3 times the employees average 5-year annual compensation.

Currently, covered employees are only the top 5 highest paid current or former employees. Beginning next year, OBBBA makes any employee a covered employee. This change triggers an important reminder on how compensation is counted for purposes of the Section 4960 Threshold, especially deferred compensation. Compensation includes any compensation considered wages subject to income tax withholding. However, it also includes any other compensation not paid in the year in question, to the extent it would be considered vested (not subject to a substantial risk of forfeiture) as that term is defined for Internal Revenue Code section 457(f) plan purposes. This would include such things as bonuses, severance pay, and benefits under 457 plans.

457 Plans. There are two types of employers that can adopt a 457 plan, tax exempt organizations and state or local governments (governmental). See, Ten Common Mistakes In 457 Plans of Tax Exempt Organizations–Part 1. It is important to note that governmental organizations are not subject to the Code section 4960 excise tax. It is also important to note that a 457 plan of a tax exempt organization must be a top hat plan primarily for the benefit of a select group of management or highly compensated employees.

There are two types of 457 plans : 457(b) and 457(f) plans. The principle difference between the two is how benefits are taxed. The benefits of a 457(b) plan are subject to income tax when they are paid or otherwise made available. The benefits of a 457(f) plan are subject to income tax when the participant’s right to the benefit is no longer subject to a substantial risk of forfeiture. Thus, benefits under a 457(b) plan may be fully vested without triggering income tax. The other major difference is that the amount of annual contributions that may be credited to a 457(b) plan is limited each year. Currently that amount is $23,500, but it is adjusted for inflation annually. There is no limit to the amount that can be credited to a 457(f) plan.

As mentioned above, compensation that is not paid currently is subject to the Threshold for Section 4960 purposes when vested. Therefore, amounts credited to a 457(b) or 457(f) plan of a tax exempt organization will count against the Threshold when vested. Contributions to a 457(b) plan are usually vested when made. If they are employee salary reduction deferrals they must be fully vested. However, employer contributions are often vested, as well. This means they will count against the Threshold in the year made. Typically, contributions to a 457(f) plan are subject to vesting after a number of years of service to avoid income tax in the year of deferral. Tax exempt organizations must keep this in mind because there could be a substantial account balance that vests in a given year which when counted with the employee’s other compensation for the year, could exceed the Threshold. This should be considered when designing the plan.

Conclusion. The changes by OBBA expand the number of covered employees whose compensation could trigger the Section 4960 excise tax. Tax exempt organizations must keep in mind the vesting rule of Section 4960 when designing 457 plans for their executives.

On June 5, 2025, the United States Court of Appeals for the Ninth Circuit reversed the district court’s grant of summary judgment against two employees who had signed fiduciary liability releases in order to receive reduced severance benefits but later sued in a class action alleging the plan fiduciaries breached their duties in obtaining the releases. The case is Schuman v. Microchip Technology Inc., No. 24-2624, 24-2978, __ F. 4th __, 2025 WL 1584981 (9th Cir. Jun. 5, 2025).

Background. The case resulted from a merger of Atmel Corp. and Microchip Technology. Following the merger, the surviving corporation, Microchip, announced that it would no longer honor a severance plan, that Atmel had adopted prior to the merger, for employees who were fired without cause. Two such former employees, Peter Schuman and William Coplin, filed an ERISA class action lawsuit challenging this decision and also asserting that that Microchip further violated its fiduciary duties under ERISA by encouraging employees to sign the release of claims in exchange for significantly lower benefits than they were allegedly entitled to under the severance plan.

The lower court sided with the defendants and held that Schuman and Coplin were precluded by the releases from suing and representing others who had signed releases as a class. The district court applied a six-factor test from the First and Second Circuits, in concluding that the releases were “knowing and voluntary” and therefore enforceable. The district court did not consider any evidence concerning whether Microchip had violated its fiduciary duties under ERISA in obtaining the releases. However, the district court certified a question to be answered by the appellate court. Specifically, the court asked, “whether it properly adopted and applied the First and Second Circuit’s six-part test or whether it should have considered Microchip’s alleged breach of fiduciary duties as part of its evaluation.”

Special Scrutiny Required. The Ninth Circuit answered the breach of fiduciary duty part of the question by stating, “In accord with ERISA’s purposes and guided by other circuits’ approaches, we conclude that, when a breach of fiduciary duties is alleged, courts must evaluate releases and waivers of ERISA claims with ‘special scrutiny designed to prevent potential employer or fiduciary abuse.’” The court further stated that “[r]equiring courts to consider evidence of a breach of fiduciary duty related to a release of claims under ERISA aligns with the statute’s purpose, structure, and underlying trust-law principles.”

The Ninth Circuit then examined the six-part test from cases in the First and Second Circuit but also “more comprehensive but still non-exhaustive eight- and nine-part tests.” of cases in the Seventh and Eighth Circuits. Since the Seventh and Eighth Circuit “explicitly require consideration of any improper conduct by the fiduciary,” the Ninth Circuit concluded that their approach provided the right balance between a strictly knowing and voluntary analysis and one based on ERISA fiduciary duties.

The Ninth Circuit Test. The court then held in evaluating the totality of the circumstances to determine whether the individual entered into the release or waiver knowingly and voluntarily, courts should consider the following non-exhaustive factors: (1) the employee’s education and business experience; (2) the employee’s input in negotiating the terms of the settlement; (3) the clarity of the release language; (4) the amount of time the employee had for deliberation before signing the release; (5) whether the employee actually read the release and considered its terms before signing it; (6) whether the employee knew of his rights under the plan and the relevant facts when he signed the release; (7) whether the employee had an opportunity to consult with an attorney before signing the release; (8) whether the consideration given in exchange for the release exceeded the benefits to which the employee was already entitled by contract or law; and (9) whether the employee’s release was induced by improper conduct on the fiduciary’s part.

Case Remanded. The court then reversed the grant of summary judgment against Schuman and Coplin and remanded the case back to the district court to consider the factors in the test it adopted.  The court noted that “because “where, as here, the district court found a genuine issue of fact material to the issue of a breach of fiduciary duty in obtaining the release of claims, the final factor warrants serious consideration and may weigh particularly heavily against finding that the release was ‘knowing’ or ‘voluntary’ or both.” 

Conclusion. This case is a reminder that employers that administer ERISA-covered severance plans are fiduciaries when administering those plans. Attempting to provide lower benefits than offered under the severance plan in exchange for a release could potentially lead to the release not being enforceable due to a breach of fiduciary duty.