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409A Issues in Spin-Off with NQDC at Parent Level

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Looking for thoughts on an issue of first impression for me. Company A is the parent of Company B. Employees of Company B participate in a nonqualified deferred compensation plan maintained by Company A. Company A spins off Company B and, for business reasons, does not terminate the NQDC plan as to the employees of Company B (as would be permitted under Section 409A's termination rules in connection with a change in control). Employees of Company B have not undergone a separation from service because of the spin off because they still work for Company B.

Company A retains the pre-spin liabilities relating to the NQDC plan and arranges for Company B to notify Company A when an employee separates from service with Company B (and all the post-spin entities in Company B's new controlled group) so Company A can commence payment under the NQDC plan. Following the spin-off, for business reasons, Company A and Company B want to allow employees of Company B to continue to participate in the NQDC plan maintained by Company A for a period of years.

Can employees of Company B participate in the NQDC plan maintained by Company A once Company B is no longer in Company A's controlled group of corporations? If Company B wants to provide the same benefit post closing, does Company B need to set up its own NQDC plan that "mirrors" Company A's? What about funding - If Company B sets up its own NQDC plan, can Company B send the contributions to Company A to administer and not result in income inclusion under a constructive receipt/economic benefit theory because the contributions are no longer subject to the claims of the creditors of Company B?

It seems to me that Company B can leave behind with Company A the pre-spin liabilities relating to the NQDC plan without issue. Keeping any assets related to those liabilities with Company A makes sense because Company A is responsible for payment. Post-spin participation of Company B employees in Company A's NQDC plan seems problematic but can't nail down exactly why. It also seems that if Company B sets up its own mirror plan, any funding must be left with Company B or be put in a rabbi trust that is subject to the claims of Company B's creditors. Sending contributions for post-spin obligations to Company A, or putting in the rabbi trust for the NQDC plan maintained by Company A (which is subject to claims by Company A's creditors) seems problematic because the amounts are no longer reachable by Company B's creditors.

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