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"funding" shortfall in NQDC plan


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the employer is using insurance. the plan is basically an unfunded SERP, there is no rabbi trust (or any trust for that matter), and the accounts are not vested until 10 years. the employer is using life insurance and the investment returns have been less than the account balances should be. is it possible to amend the plan in order to change the benefit due each participant? the plan seems to allow for this. i was thinking however there might be some contractual obligation and that the employee would have to agree to a lesser benefit. any thoughts?

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A contractual obligation to pay benefits can only be made under the terms of the plan document and collateral obligations such as employment contracts. Your client needs to retain counsel to determine whether accrued benefits can be reduced without the employee's consent.

mjb

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Yep, if your talking about retroactively reducing a compensation promise made, but payment deferred, the employer needs advice of counsel and a review of the docs. The scenario you refer to is very common, didn't the employer notice the LI asset wasn't matching the plan liability?

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i am looking to make a preliminary determination on my own. what is the general rule of thumb when dealing with NQDC plans? can employers reduce benefits unilaterally if they are not vested?

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NQDC are top hat plans exempt from ERISA rules regarding cutback of benefits, vesting etc. You need to review plan documents regarding right to reduce accrued benefits as well as employment contracts or other agreements. Many TH plans have a provision that prevents employer from reducing accrued benefits but can only reduce future accruals. Some plans limit liability to assets reserved to pay benefits under the plan. There is no general rule because it depends on how the plan drafter decided to handle the issue. Poorly drafted plans are silent on the reduction issue which creates ambiguities over the right to reduce benefits. Employers have been sucessfully sued because they reduced benefits or terminated TH plans without appropriate language. There is no alternative to retaining counsel.

mjb

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the plan document basically says that the plan creates an unsecured claim on behalf of the participants and constitutes a mere contractual obligation. i think the solution here is for the employer to amend the plan and say contributions will not be made going forward. then they can catch up and make up the contributions they never made.

a correction from my initial post. in addition to the investment returns not being good, the company has failed to make contributions for some years.

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Some NQDC plans say the employer has no obligation to fund the benefits through a rabbi trust or otherwise. If this is the case, you wouldn't have to do anything.

If the NQDC plan obligates the employer to fund through a rabbi trust, there would be a contractual obligtion on the part of the employer to do so. A unilateral change of the contract generally wouldn't be allowed, but you'd have to look at the NQDC plan (the contract) to see what it says. I've seen some weird ones that say first, that the employer is obligated to do something, but that second, the employer can unilaterally amend the contract.

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