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Employer contribution requirement/participant rights


Belgarath

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Suppose you have a non-governmental, tax-exempt 457(b) plan. No deferrals, just employer nonelective contributions only.

Now, suppose the employer's contract with the employee states that a specified amount (X) will be contributed each year for the employee. There is no language in the plan itself that states this. No Rabbi trust is in effect.

The employer never "funds" this - yes, I know, it is an "unfunded" plan anyway, and assets are general assets of the employer.

The point being that the employer is now in financial difficulty, although not yet, at least, in formal bankruptcy, and a terminated participant wants his money, and there is no money.

Am I correct in assuming that state law/employment/contract law would govern the remedies available to this participant? The plan provides, under claim procedures, that after jumping through the appropriate hoops, the participant may avail himself of the remedies under ERISA 502, but what does this really mean in practical terms?

Does this participant have rights that supercede those of other creditors, until such time as they are in bankruptcy, or is that again based on state law?

This is all a new one on me...

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A part of what makes this kind of deferred compensation unfunded (as described in IRC 457(b)(6)) is that a participant has no better right than another general creditor.

If the agreement between the employer and the employee says the employer "will contribute" each year's specified amount, might one interpret the agreement as including the employer's obligation to establish a fund a rabbi trust?

But remember, for a rabbi trust not to undo the unfunded nature of the plan, the trust's assets must be available to the employer's creditors.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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It is still an ERISA plan, which generally means that the participant is entitled only to what the plan provides. As for "contribute," a lot of plans are poorly drafted and a better term would be "credit" to the bookkeeping account that measures the employer deferred compensation obligation. Leaves open the opportunity to dispute the meaning of a term that has no meaning under section 457(b).

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