Alexander v. Brigham and Women's Physicians Org., C.A. No. 04-10738-MLW.

Citation467 F.Supp.2d 136
Decision Date26 December 2006
Docket NumberC.A. No. 04-10738-MLW.
PartiesEben ALEXANDER, III, M.D. v. BRIGHAM AND WOMEN'S PHYSICIANS ORGANIZATION, INC., et al.
CourtUnited States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of Massachusetts

Colleen C. Cook, Michael G. Paris, Nystrom Beckman & Paris LLP, David C. Casey, Littler Mendelson P.C., Boston, MA, for Eben Alexander, III, M.D.

David C. Casey, Gregory C. Keating, Laurie Drew Hubbard, Littler Mendelson P.C., Boston, MA, for Brigham and Women's Physicians Organization, Inc., et al..

MEMORANDUM AND ORDER

WOLF, District Judge.

I. SUMMARY

Plaintiff Eben Alexander, III is a neurosurgeon. He was a member of the defendant Brigham Surgical Group Foundation ("BSG") from 1988 until his employment was terminated in 2001 by BSG's successor, defendant Brigham & Women's Physicians Organization, Inc. ("BWPO").1

BSG maintained two unfunded deferred compensation plans for its surgeons who were, like Alexander, also members of the Harvard Medical School Faculty. These were, the Faculty Retirement Benefit Plan (the "FRBP") and the Unfunded Deferred Compensation Plan (the "UDC"). Alexander and other BSG surgeons who were affiliated with the Harvard Medical School were required to contribute to the FRBP and UDC if their "Net Practice Income" ("NPI") for a particular year exceeded the salary cap for Harvard Medical School faculty. The plans provided that the accounts of such surgeons in the FRBP and UDC would be reduced to offset any "practice deficit" the surgeon experienced in a subsequent year.

In some years Alexander generated NPI and, therefore, contributed to the FRBP and UDC. In other years he experienced a practice deficit. When Alexander was terminated by BSG he was informed that his accounts in the FRBP and UDC had been reduced to offset his accumulated practice deficit.

In 2004, Alexander filed this suit alleging that in reducing his FRBP and UDC accounts BSG, and other defendants involved with the FRBP and UDC, violated various state laws and the Employment Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq. Counts I-VIII, which alleged various state law claims, were dismissed. The parties then represented that a decision on Counts IX and X would, as a practical matter, resolve this case.

In Count IX Alexander alleges that the reduction of his FRBP and UDC accounts violates ERISA's vesting requirements and in Count X he alleges a related violation of ERISA's fiduciary responsibility provisions. In response, BSG asserts that the FRBP and UDC are "top hat" plans, as to which ERISA's vesting and fiduciary responsibility provisions do not apply.

The court denied the parties' cross-motions for summary judgment on the issue of whether the FRBP and UDC were top hat plans. A non jury trial on this issue was conducted in October, 2006.

For the reasons described in detail in this Memorandum, BSG has proven that the FREP and the UDC were each top hat plans. Therefore, the vesting and fiduciary responsibility provisions of ERISA do not apply to them. Thus, it was permissible for BSG to reduce Alexander's accounts in those plans to offset his practice deficit. Accordingly, BSG is entitled to judgment on Counts IX and X.

Based on the parties' representations, the court understands that the remaining counts, XI, XII, and XIII, will be voluntarily dismissed. The parties are being ordered to confer and inform the court, by January 12, 2006, whether those counts should be dismissed, which will render judgment complete and appealable.

II. FACTS

The following facts have either been agreed upon by the parties or proven by a preponderance of the credible evidence.

Alexander is a neurosurgeon. In 1988, he accepted an invitation to become a member of BSG.

BSG is a non-profit, tax-exempt organization established pursuant to 26 U.S.C § 501(c)(3). Members of BSG were virtually all members of the faculty of the Harvard Medical School, another non-profit, tax-exempt § 501(c)(3) corporation.

BSG had several purposes. Its members had various academic ranks and taught surgery to students of the Harvard Medical School. They also constituted the Department of Surgery at the Brigham & Women's Hospital, where they conducted surgery and trained surgical residents.

In order to maintain its non-profit, tax exempt status, a § 501(c)(3) corporation must place reasonable limits on the income of those it compensates in order to assure that its earnings do not "inure to the benefit of private individuals." 26 C.F.R. § 1.501(c)(3)-1(c)(2). Therefore, the Harvard Medical School imposed an annual cap on the maximum compensation that could be received by a faculty member and BSG adhered to that cap.

However, the salary cap presented a challenge to BSG's efforts to recruit and retain excellent surgeons, who could earn far more than the maximum Harvard Medical School salary if they worked elsewhere. This dilemma came into sharp focus when one of its most prominent surgeons, Dr. L.C.,2 threatened to leave BSG for a more lucrative position.

Motivated by a desire both to adhere to the Harvard Medical School salary cap, and to provide the financial incentives necessary to recruit and retain excellent surgeons, BSG established two unfunded deferred compensation plans to which the most profitable surgeons each year would contribute—the FRBP and the UDC. Compensation was deferred to the UDC and/or FRBP only if a physician was employed by the BSG, a member of the fulltime faculty of the Harvard Medical School, and generated an NPI in excess of the Harvard Medical School salary cap. If a physician generated an NPI that would raise his salary higher than this limit, BSG would reduce his salary by 25% and credit that amount to the FRBP. If any NPI remained, BSG would credit 50% of that remainder to the UDC. This was the only mechanism through which a physician could deposit money into a FRBP or UDC account. Money could not be withdrawn from these accounts until a member retired or died.

While motivated by the Harvard Medical School salary cap and the desire to recruit and retain excellent surgeons, the FRBP and the UDC were established and maintained primarily for the purpose of providing deferred compensation for a select group of BSG's most highly compensated members.3 These plans supplemented rather than substituted for other qualified retirement plans for which all BSG employees were eligible.

The FRBP and UDC were intended to be ERISA top hat plans, which would, among other things, be exempt from the vesting and fiduciary responsibility requirements of ERISA. The plans each gave BSG the right to reduce a member's FRBP and UDC accounts by the amount of his or her practice deficit for a particular year. A practice deficit occurred when the expenses attributed to a surgeon's practice exceeded the income that practice generated for the year.

Alexander received a description of the pertinent provisions of the FRBP and UDC when he joined BSG in 1988. Thus, he was put on notice that any deferred compensation that he earned would be reduced by any practice deficit he subsequently experienced. Alexander did not, however, have the opportunity or ability to decline to contribute to the FRBP or UDC if he earned enough to do so. Nor did he alone have the ability to negotiate modifications to either plan. Rather, if Alexander wanted to, be a member of BSG and of the Harvard Medical School faculty, he had to accept the terms of those plans.

In certain years, Alexander generated NPI, which resulted in amounts being credited to his accounts in the FRBP and UDC. In other years, Alexander experienced a practice deficit.

On April 13, 2001, Alexander was notified by BSG that his employment was terminated. On April 23, 2001, his FRBP account was reduced by $190,000.00 and his UDC account was reduced by $251,887.16 to offset his practice deficit.

As explained earlier, Alexander now asserts that neither the FRBP nor the UDC was a top hat plan exempt from. ERISA's vesting and fiduciary responsibility provisions. Therefore, he contends that BSG was not entitled to reduce the amounts of deferred compensation attributed to him for certain years because of his practice deficits in other years.

The relevant years for determining whether the FRBP and UDC constituted top hat plans are fiscal years 1997, 1998, and 1999.4 All surgeons who were fulltime faculty of the Harvard Medical School were eligible to contribute to the FRBP and the UDC. The number of such surgeons was 78 in 1997, 84 in 1998, and 88 in 1999. In those years, BSG had many other employees, totaling (including surgeons) 241 in 1997, 274 in 1998, and 324 in 1999.5

When the FRBP was established it was uncertain how many surgeons would earn enough in a particular year to contribute to it. When the UDC was established, it was anticipated that no more than A% of BSG employees would earn enough each year to contribute to it.

In fact, in 1997, 21 BSG employees, constituting 8.7% of the total number of BSG employees, contributed to an FRBP account. These figures were 17 and 62% for 1998, and 16 and 4.9% for 1999.

Similarly, in 1997, 14 BSG employees, constituting 5.8% of the total number of BSG employees, contributed to a UDC account. These figures were 9 and 3.3% for 1998, and 10 and 3.1% for 1999.

In each of the relevant years, the surgeons who could theoretically have earned enough to contribute to the UDC and/or FRBP were about 30% of BSG's total workforce. More specifically, they were 32.4% of the total work force in 1997, 30.7% in 1998, and 27.2% in 1999.

There were some non-surgeons who earned more each year than some surgeons. However, those who contributed to the FRBP or UDC were necessarily both surgeons and the most highly compensated employees of BSG. The average compensation of employees who contributed to the UDC plan during 1997, 1998, and 1999 was $503,730, $581,320, and $483,073 respectively. The average compensation of employees who contributed to the FRBP plan...

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