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calexbraska

Can a NQDC Plan be spun off?

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We have a management company that runs a NQDC plan.  The management company is wholly owned by A, and A also wholly owns B.  B also participates in the NQDC plan. 

The management company is going to be removed and replace with a different management company.  Under the NQDC plan this does not trigger a change of control payment.  But we have employees at B that are participants in the NQDC Plan.  We have two options.

First is to just start a new plan for the B employees.  They will still have their account under the old plan, but now they will have another account at a new plan.

Second, and what we'd like to do, is move the accounts for B employees to a new plan, sponsored by either B or A.  Is that possible?  It would be sort or like a rollover to a new plan.  According to the plan, amounts deferred for B employees are already paid out of the general assets of B, and subject to B's creditors, so I don't see the issue with having the money follow B, instead of staying in a plan run by the old management company.  Is this something we can do?

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29 minutes ago, PensionPro said:

why not transfer the obligation for the deferred compensation from the old management company to the new management company?

My concern is that the assets have to be subject to the creditors of the company.  If the old management company transfers to the new management company, and then the old management company later goes insolvent, there could be an issue if the old management company passed on any assets to the new one.

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Transfer of assets is a different question than transferring the plan.  I have seen spin-offs where plans are carried from Oldco to Newco, but whether assets were transferred really were dependent on the nature of the transaction and whether any informal funding assets were owned by Oldco or owned by a rabbi trust.

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You're entirely correct there.  Here, the plan is largely funded by employee elective deferrals, so the new management group is unlikely to be OK with the old management group passing on the plan (and the payment obligations thereunder) without also passing on the amounts the old management group withheld from paychecks.

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In connection with the spin-off, the employees could negotiate with B to require that it create a rabbi trust and fund it at least with the amount of their elective deferral accounts.

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I'm not sure I understand the facts. A owns the management company and owns B. What do you mean, Calexbraxa, when you say the management company is going to be "replaced?" Sold? I'm not sure I see the transaction.

Anyway, I think NQDC spinoffs are fairly common, and certainly we have done them. Since NQDC plans are just promises to pay, what you are doing when you "spin off" part of an NQDC plan to another company, e.g. to the acquirer of a division of the company that has the NQDC plan, is transferring the obligation to pay to the sponsor of the new spun off plan. The biggest issue, I think, is whether the employees covered by the plan can object to having the obligation to pay them transferred to a new company. This depends in part on what the plan says, and certainly if the source of the obligation was executive deferrals and the transferee entity was weaker financially than the transferor, you could have issues, although you're sort of in no-man's land, since ERISA preempts state law in the area, and there is no substantial body of rules under ERISA for NQDC plans. But from the standpoint of the employees' tax issues, they are just getting a new unfunded, unsecured promise to pay money in the future, from someone else, to replace their old unfunded, unsecured promise to pay money in the future. That should not be taxable in and of itself, although you could stray into a minefield if you attempt to give employees' choices.

Obviously, the transferee is not going to take on the obligation without getting compensated for doing that. Usually these transactions occur in an M&A context, so the purchase price of the subsidiary or division may be reduced to reflect the liability being taken on by the acquirer. If assets are transferred, e.g. a rabbi trust is divided, or life insurance policies are transferred, there are tax issues you have to work through. Actually, even if assets are not transferred there may be tax issues for the employer, depending on the transaction.

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