pjkoehler

What do the terms of the ESOP loan note provide in the event of borrower's default on a scheduled payment? If the methods of curing the borrower's default do not include lender's "forgiveness," and they may well not because that would hardly be commercially reasonable, you'd be well advised not to ignore the terms of the note and follow some ad hoc procedure. A typical method of curing the default when the ESOP defaults due to the employer's failure to make a contribution is to transfer unallocated shares back to the lender in an amount equal to the missed payment(s). See Treas. Reg. 54.4975-7(B)(6).

EAKarno: In what sense is the employer's obligation to transfer property contingent upon the the optionee's payment of the exercise price (however, formulated) "economically identical " to an obligation to pay money in the future, which is at most contingent on the employee's performance of future services. Designed to achieve the objectives of a deferred compensation arrangement and, therefore, similar, sure, but "identical." Give me a break. Form over substance is an attrative catch-all doctrine, which, like the step doctrine, the IRS uses judicially, i.e. selectively. If you're philosophically opposed to the idea you might find it persuasive, but it doesn't mean these options are devoid of any substance or lack the essential economic attributes of option contracts. Take for example, the case of the insolvent optionee who is economically unable to tender the exercise price with respect to vested options before they expire. Is his position "economically identical" to the position of a participant in a NQDC plan? Firstly, the vested NQDC participant has an unfettered right to receive payment as of the distribution date first to occur under the plan. If the employer fails to perform, the participant can bring a collection action, become a judgment creditor, etc. Not so the insolvent optionee. Second, options expire. If the optionee doesn't exercise by the expiration date, he will permanently forfeit the option privilege. Not so the NQDC participant. His contract claim against the employer is subject only to the statute of limitations applicable to the collection action under state law. Even if you want to presume that all such plans provide for cashless exercises, the insolvent optionee has to pay the brokerage fees and interest charges associated with that transaction, which is clearly economic detriment to which the NQDC participant is not subject. You are also completely forgetting about ERISA. That's right, even ERISA "top hat" plans (like 457(f) plans for EOs) are subject to ERISA's civil enforecment provisions. The participants have rights to disclosure of information and access to a developed claims procedure and all the other protections. Not so, the optionee. If the employer chooses to wrongfully breach the option agreement, the optionee has no standing to bring an action in federal courts, claim relief under the causes of action specifically created by ERISA or seek recovery of his attorney fees. He'll have to slug it out in state court at his own expense. These aren't abstract distinctions with no economic impact. Your "form over substance" argument might well be adopted by the Service and ultimately affirmed by the Tax Court, but that doesn't mean two different things with similar economic objectives, are "identical."

It is totally illogical, because it creates a sliding scale that rewards late depositors. My experience in DOL examinations is that the DOL tends to set a standard based on the capacity of the company's payroll processing system to generate the "information" that would allow the company to transmit the funds to the trustee. The actual track record of depositing the funds is not very relevant to setting the standard, unless the company can show that it lagged the system's information flow for plan-related reasons.

Ellie: Do you read 457(e)(17) as extending the tax treatment applicable to "transfers" between eligible deferred compensation plans described in 457(e)(10) to these special purpose transfers to defined benefit governmental plans? 457(e)(10) says it applies to the "amount payable" under the transferor plan, which would probably restrict the transfer treatment to distributions allowable under the plan, which would not include elective in-service transfers because they don't satisfy the distribution requirements. On the other hand, 457(e)(17) refers to "trustee-to-trustee" transfers from an eligible plan to a defined benefit governmental plan without reference to the "amount payable." I guess it could be argued that the trustee of the transferor plan is not in a position to transfer an amount other than an "amount payable" under that eligible plan, so the "amount payable" restriction is implied. You may have a better handle on this section, so I wonder if you read 457(e)(17) to be more expansive that 457(e)(10) in that regard? For instance, if a city maintains multiple eligible deferred compensation plans and a defined benefit governmental plan and some how an employee became covered by 2 or more of the deferred comp plans and the defined benefit plan, do you think under these rules the employee would not be able to direct a trustee to trustee transfer between the deferred comp plans because he is not eligible for a distribution, but would be able to transfer amounts from either plan to the defined benefit plan for the purpose stated in 457(e)(17)?

jms370: The Supreme Court addressed this issue in Firestone Tire & Rubber v. Bruck, 489 US 101 (1989). The term "participant" for purposes of determining the persons entitled to information and documents under ERISA disclosure requirements is not limited to the meaning ascribed to the term "participant" on the records of the plan administrator, but is more expansive and includes any person with a "colorable claim" for benefits, i.e. a mere good faith belief whether or not he is ultimately correct. The information requested by this former employee is within the scope of the information ERISA Sec. 104(B)(4) requires to be made available to a "participant" upon written request. Failure to provide the information to a "participant" subjects the plan administrator to a penalty of up to $100 per day for each day it is late. ERISA Sec. 502©(1). Look at it this way, whether or not the distribution that the employee you've mentioned received was "total" under the plan is potentially an issue that a court/arbitrator may have to decide, i.e. was the participant entitled to additional benefits? From a litigation-avoidance strategy point of view it makes much more sense to give the former employee this information. First, of all, the failure to do so potentially creates a cause of action against the employer (in addition to the underlying claims of wrongful denial of benefits and breach of fiduciary duty for failure to provide access to the plan's claims procedure). This, of course, is likely to increase the settlement value of the case. (Employer's who play hardball over this information unnecessarily tends to get the interest of plaintiffs' lawyers - as in "what are they hiding?") Second, if the employer's determination is based on unambiguous plan terms, then giving the former employee this information is likely to persuade him that his claim is not meritorious and he'll go away or at least his quest for a contingency fee lawyer to take his case will be unsuccessful. That's a good cost-benefit relatioship. Third, not giving him this information and forcing him to litigate to get it in order just to be able to determine whether he has a colorable claim creates a negative impression of the defendant-plan administrator's fiduciary instincts to the court. Many courts take the view that plan administrators who do that got trapped in an employer-former employee paradigm rather than the appropriate fiduciary-participant paradigm. Judges with busy dockets have a tendency to lose patience with parties that force former employees to litigate issues like this.

mariko: the parent's financial condition is really a nonissue insofar as the sub's ability to establish that the employees' benefits are subject to a substantial risk of forfeiture. With regard to taxable plan sponsors, a substantial risk of foreiture exists or not depending on whether, under the terms of the plan (and rabbi trust if one is maintained), the employee's right to receive payment in the event of the employer's insolvency is not superior to the rights of the sub's general creditors. Regardless of the financial condition of either parent or sub, a substantial risk of forfeiture probably exists so long as (a) the sub has not set aside assets beyond the reach of its general creditors to pay benefit claims and (B) the parent has not guaranteed payment of the unpaid benefits or otherwise pledged its assets as security for the sub's benefit liabilities. Please note: there may very well be a special class of creditors who would have unique contractual rights to hold the parent liable for the sub's debts, e.g secured creditors or creditors with special indemnification agreements with the parent. These are not the sub's general creditors and the participant's would not be exposed to a substantial risk of forfeiture if their right to payment enjoyed the same seniority over the sub's general creditors.

A quick check of Code Sec. 457(d) reveals that a 457(B) plan may not permit a distribution earlier than (1) attainment of age 70 1/2, (2) a severance from employment with the employer and (3) an unforeseeable emergency. Presumably, if the city's plan is a 457(B) plan, it does not permit a direct trustee-to-trustee transfer in circumstances that do not satisfy these criteria.

I assume that the 2000 Form 5500 reported the "accrued" company matching contribution on the basis of the deemed contributed rule set forth in Section 404(a)(6) for deduction purposes. That section provides that a taxpayer will be deemed to have made a payment on the last day of the preceding taxable year if such payment is "on account of" such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions). Rev. Rul. 76-28, 1976-1 C.B. 106, discusses the "on account of" requirement, and provides that a contribution made after the close of an employer's taxable year will be deemed to have been made on account of the preceding taxable year under section 404(a)(6) if, among other conditions, the company designates the payment in writing to the plan administrator or trustee as for the preceding taxable year or the company claims it as a deduction on its tax return for the preceding year. Once a payment has been so designated or claimed, the choice is irrevocable. On your facts the "accrued" contribution was not made as of the section 404(a)(6) deadline. Accordingly, it was not deemed to have been made as of the last day of the 2000 plan year, which makes reporting it on the 2000 Form 5500 as an "accrued" contribution inaccurate. Technically, an amended return is order. QUESTION: What is the plan year and taxable year of the employer? If the plan operates on a calendar plan year and the company has a calendar year taxable year, the nonpayment would have been apparent by September 15, 2001. I assume the company filed its corporate tax return by that date and did not claim the deduction. The extended filing deadline for the 2000 Form 5500 was October 15, 2001. Assuming that the company obtained an extension for the 2000 Form 5500 and filed it after September 15, 2001, wouldn't it have known that the form was inaccurate when filed? To the extent the employer communicated the amount of the 2000 "accrued" contribution to the employees, e.g. in the form of benefit statements or otherwise, participants theoretically could argue, on the basis of the Supreme Court decision in Verity that, to the extent the persons responsible for the communications were also plan fiduciaries (members of the plan admininstrative committee, trustees, etc.), they had a duty not to communicate information that they knew or should have known to be false, which could expose those persons to personal liability for breaching one or more of ERISA's fiduciary responsibilities.

The difficulty we're having here stems from a failure to distinguish between a burden of production (the obligation of a party to present some evidence to support its claims) and the burden of persuasion (the obligation of convincing the trier of fact as the validity of claims). This thread evolved only to debunk the dangerously naive notion that defendant-fiduciaries in ERISA civil litigation (1) have a burden of production only if the plaintiff first persuades the court as to the validity of its claims in its case in chief and (2) that they have no burden of persuasion as their own affirmative defenses or their motions for summary judgment, directed verdict, etc. As anyone whose had any experience with civil litigation knows, civil defendants do not benefit from something akin to a presumption of innocence applicable to criminal defendants that exclusively assigns these burdens to the government. In civil litigation, the burdens of production as to the plaintiff's case in chief shift and the plaintiff is entitled to a presumption that facts are as it pleaded them if the defendant chooses to ignore its burden. That would be disasterous for the defendants and grounds for a malpractice claim against the attorney who so advised the fiduciary.

kkost: One of the principal advantages of this strategy vis a vis traditional deferred compensation is the executive's access to the intrinsic value of the option property (most likely publicly traded mutual fund units). Assuming this works the executive can exercise at any time all or any portion of his vested options without regard to his employment status, i.e. in the vernacular of deferred comp s/he can obtain an in-service withdrawal without being subjected to a so-called "haircut" penalty (usually at least 10%) a necessary evil presumed to be required under traditional deferred comp to avoid application of the "constructive receipt" doctrine, assuming the deferred comp plan would allow in-service withdrawals at all. The arguments in favor of this theory run like this: Sections 83(e)(3) and (4) govern the tax treatment of options (other than statutory options) granted to employees in connection with the performance of services. Section 83(e)(3) states that section 83 does not apply to the transfer of an option without a readily ascertainable fair market value. Section 83(e)(4) states that Section 83 does not apply to the transfer of property pursuant to the exercise of an option with a readily ascertainable fair market value. The IRS has issued regulations interpreting sections 83(e)(3) and (4). Although the caption to these regulations refers specifically to nonqualified stock options, the reasoning behind the regulations should apply equally to options to buy other types of property. (The Tax Court and the IRS, for example, have applied these regulations to options to buy partnership units. See Schulman v. Commissioner, 93 T.C. 623 (1989); PLR 9801016.) It may be argued that the absence of any language in sections 83(e)(3) and (4) limiting the application of those sections to stock options supports this interpretation. Under the regulations, if an option granted to an employee in connection with the performance of services has a readily ascertainable fair market value at the grant date, the employee has received property for section 83 purposes at the grant date -- and therefore has compensation income under section 83 on that date. Reg. section 1.83-7(a). An option that was taxable at grant because it had a readily ascertainable fair market value at grant is not subject to tax at exercise. In contrast, if the option does not have a readily ascertainable fair market value at the time of grant, section 83(a) does not apply at the grant date. Rather, section 83(a) applies at the time the option is exercised or otherwise disposed of, even if the option's fair market value becomes readily ascertainable before that time. Reg. section 1.83-7(a). If the option is exercised, section 83(a) applies to the transfer of property pursuant to the exercise, and the employee realizes compensation on the transfer at the time and in the amount determined under section 83(a) or 83(B). Thus, if the property the employee receives pursuant to the exercise of the option is transferable or not subject to a substantial risk of forfeiture, the employee must recognize as income upon the exercise an amount equal to the difference between the exercise price and fair market value of the property.

IRC401, the case law that supports the contrary point of view includes the following Commissioner v. LoBue, 351 U.S. 243 (1956), an employee was granted options to buy shares of employer stock at a price that equaled only 25 percent of the shares' fair market value as of the grant date. The Court concluded that the taxable amount was equal to the spread between the exercise price and the fair market value of the underlying shares on the exercise date -- the same treatment accorded at that time to nondiscount options. Victorson v. Commissioner, 326 F.2d 264 (2d Cir. 1964), aff'g T.C. Memo 1962-231, Victorson received the right to buy shares of Glamur Products stock, contingent on his firm's successful completion of the underwriting of Glamur Products stock. The exercise price was $.001 a share -- a 99.8 percent discount from the $.50 public offering price. Citing LoBue, the court held that Victorson had to include the spread in income in the year of exercise. Simmons v. Commissioner , T.C. Memo 1964-237, the Tax Court held that a taxpayer who was entitled to buy, for $.001 a share, stock worth $1 a share, was taxable in the year of purchase and not on the grant date. Citing LoBue, the court stated that if an option has no readily ascertainable fair market value and is not assignable, then receipt of the option did not give rise to income. The fact that the exercise price was nominal did not affect the court's decision. Graney v. United States b, 258 F. Supp. 383 (DC W.Va., 1966) an executive was granted an option to buy company stock at $25 a share. Both the executive and the employer treated the stock as having a fair market value of $75 a share, and the executive agreed to sell the stock back to the employer at $190 a share. The court found that the agreement was an option and not a sale. Thus, the executive recognized income in the year of exercise regardless of the discounted option price. LoBue, Victorson, Simmons, and Graney were decided before section 83 came into existence. However, LoBue established the basic principles used in the section 83 regulations for taxing nonstatutory compensatory options: Such options are classifed as either-- options with a readily ascertainable fair market value at grant or options without a readily ascertainable fair market value at grant -- with tax resulting at grant only with respect to the former.

mjb: burning the midnight oil at the local law library again! If you had actually read De Bruyne carefully you'd see that the Second Circuit affirmed the trial court's grant of the defendant-fiduciary's pre-trial motion for summary judgment (which came after its motion for discovery). There was no trial. Not because the plaintiff didn't carry its "burden of proof," but because he didn't produce enough evidence of a factual dispute to require a trial in the first place. Even still, the court could not grant defendant's motion unless it determined that it carried the requisite burden of persuasion. Here's a quote from Sec. 56.11 of Moore's Federal Practice: "[A] summary judgment motion entails a degree of burden shifting between movant and respondent. Before a court will consider granting summary judgment, the movant (the defendant-fiduciary in De Bruyne) must make a prima facie showing that the standard for obtaining summary judgment has been satisfied....Courts frequently use the term ''prima facie'' term as a shorthand referring to the requisite showing a party must make to obtain or defeat summary judgment." A more instructive and more recent case on point is Bussian v. RJR Nabisco, Inc., 223 F.3d 286 (5th Cir. 2000). There, the Fifth Circuit reversed the district court's grant of the defendant-fiduciary's motion for summary judgement. The court cited Rule 56© of the Fed. Rules Civ. Proc., to wit: in considering a motion for summary judgment (in this case kicking the plaintiffs out of court) it was obligated to "view all evidence in the light most favorable to the party opposing the motion (the plaintiffs) and draw all reasonable inferences in that party's favor. " The court held that a trier of fact could conclude that RJR had breached multiple fiduciary duties by funding plan termination benefit committments with Executive Life Insurance Company annuity contracts and threw the fiduciaries right back into the ring with the unhappy plan participants. Still think the defendant-fiduciary who cannot obtain summary judgment has no burden to carry? (That's a rhetorical question.)

Attention mjb: overexposure to "West Wing" episodes has been known to cause delusions of certainty about complex bodies of law. Take for example, the Federal Rules of Evidence and the Federal Rules of Civil Procedure, which long ago replaced the term burden of proof in favor of using its components: (1) burden of persuasion and (2) burden of production, also referred to as "presumptions." The rules allocate them among the adverse parties depending a myriad of factors. Now, law shools devote multiple semester courses to explaining these concepts, but anyone for whom Martin Sheen is a guiding light shouldn't have to undergo such exposure to utter unqualified opinions into the public domain. To help you out, here is a portion of the Conference Committee Minutes regarding the last time Rule 301 of the Federal Rules of Evidence was amended. "Under the Senate amendment, a presumption is sufficient to get a party past an adverse party's motion to dismiss made at the end of his case-in-chief. If the adverse party offers no evidence contradicting the presumed fact, the court will instruct the jury that if it finds the basic facts, it may presume the existence of the presumed fact. If the adverse party does offer evidence bproof of the basic facts. The court may, however, instruct the jury that it may infer the existence of the presumed fact from proof of the basic facts. bbThe Conference adopts the Senate amendment." May be you should switch to "Law & Order" during commercial breaks to brush up on some of these more technical issues.

As a procedural matter, if the defendant believes the plaintiffs have no case and the facts are not in dispute, they will make a pre-trial motion for summary judgement, which usually comes after the motion to dismiss for failure to state a claim and a blizzard of other motions all designed to get the court to boot the claim before it reaches the merits of the plaintiffs' case. If the court denies these defense motions and, of course, also doesn't otherwise grant plaintiffs' motions that favorably dispose of the case before going to trial, then the defendant fiduciaries will face the burden-shifting gauntlet of rebutting plaintiffs' prima facia case and/or proving up their affirmative defenses (like, for example, 404c protection). Ergo, my use of the term "may." Of course, as you suggest, the defendant fiduciaries could chose to make no arguments and offer no evidence in the belief that the court will agree that the plaintiff failed to meet the burden of making its prima facia case. Procedurally, that usually comes about in the form of a motion just after the plaintiffs rest their case in chief. It's a lot less risky than not putting on defendants' case in chief and just hoping the court agrees with you in rendering it's verdict. As a practical matter, if the court denies defendants' motion and finds that they do not have a 404c defense, the defendants had better present the court with ample proof (evidence and arguments, if you prefer) to rebut plaintiffs' evidence and arguments, which I'm sure you realize, depending on the facts, may include theories in addition to breach of the duty of prudence, e.g. the duty of loyalty (exclusive purpose); the duty to comply with the governing instruments of the plan and even the duty to diversify plan assets (where applicable).

The 404c regs permit a covered plan to impose "reasonable" restrictions on the frequency of investment instructions. However, it specifies that restrictions are NOT "reasonable" unless, "with respect to each investment alternative made available by the plan, it permits participants and beneficiaries to give investment instructions with a frequency which is appropriate in light of the market volatility to which the investment alternative may reasonably be expected to be subject provided that ... [and then the regs specify three design based minimal requirements, including one that says that with respect to an alternative which permits a frequency greater than once every 3 months, the participants are permitted to] direct their investment from such alternative to a [low risk, liquid fund]...." Reg. Sec. 2550.404c-1(B)(2). Plan's that impose significant restrictions on frequency cannot have 404c protection and carte blanche in selecting the range of investment alternatives. Modernly, 404c plans are daily-valued plans offering investment options of publicly-traded securities, including equity securities with respect to which market volatility is generally unpredictable. Fiduciaries with respect to such plans can only aspire to 404c protection if the plan permits investment changes and inter-fund transfers to take effect (at least with respect to the equity options) as of the next following trading day. Just out of curiosity, what restrictions on frequency do you think would be "reasonable" in a market where one or more of a daily-valued 401(k) plan's equity options (employer stock or otherwise) is tanking? Arguably, any restriction on frequency is "unreasonable" in light of the market volatility of such an option. The imposition of a lockdown is a supervening event that temporarily suspends the established operating rules of the plan. And it's usually undertaken by parties who wear mulitple hats (fiduciary-employer). That's what makes such a step so perilous. A plan does not afford the fiduciaries 404c protection merely because it has language in it that conforms to the reg. It has to actually operate that way. The lockdown overrides the formal language of the plan in this regard. If large losses are reasonably foreseeable by a "prudent expert" (the standard to which ERISA fiduciaries are held), affording a fiduciary 404c protection because the plan had language in it that was intentionally disregarded in order to achieve the purposes of the lockdown, makes 404c a mere formalistic exercise, rather than the source of transactional relief it was clearly designed to be. AGAIN: Let's be clear - losing 404c protection doesn't mean the fiduciary is liable. It just means he or she may have to prove to unhappy participants that the acts that made them fiduciaries in implementing the lockdown square with ERISA's fiduciary standards despite investment losses.

Bill, who owns the for-profit entity? If the tax-exempt holds a controlling interest, the for-profit should, appropriate plan language permitting, be able to assume the benefit obligation under the tax-exempt's "top hat" plan with respect to an executive whose employment is transferred on condition that the executive enter's into a release of claims against the tax-exempt. Even, if the for-profit is not under common control with the tax-exempt, there is a line of private letter rulings that is consistent with such a transfer of liabilities. This approach avoids the unpleasantness of taxable distributions and "make-up" deferrals to restore the value of the executive's account balance.

The source is Reg. Sec. 1.401-1(a)(3)(iii), which contains the prescription that in order for a trust forming part of a plan "to constitute a qualified trust under section 401(a). It must be formed or availed of for the purpose of distributing to the employees and their beneficiaries the corpus and income of the fund accumulated by the trust in accordance with the plan ...." Since this is a fundamental qualification requirement, the IRS has taken the position that operating the plan in a manner inconsistent with its terms, could potentially disqualify the plan. In fact, its the basis for one of the qualification failures discussed in the the IRS's EPCRS. See Section 5.01(2)(B) of Rev. Proc. 2001-17, which defines the term "operational failure" to mean a qualification failure that arises solely from the failure to follow plan provisions.

Fruehauf Trailer is a decision by the Bankruptcy Court of the District Court of Delaware, which is in the Third Circuit and, therefore, prior decisions by the Third Circuit Court of Appeals are controlling authority. While the bankruptcy court in Fruehauf cited Confer, it also cited the Ninth Circuit decision in Kayser, which effectively ripped the Confer decision to shreds on the issue of whether corporate officers may be fiduciaries if they do fiduciary kinds of things, regardless of whether the corporate "named fiduciary" had expressly delegated discretionary authority to them. In fact, the bankruptcy court could have resolved the issue before it solely on the basis of Confer, it's controllling authority, but amazingly it concluded that an officer or director may be a fiduciary if he exercises discretion over the management, assets, or administration of the plan, i.e. it follows Kayser. Until and unless the Third Circuit overturns Confer, or the Supreme Court weighs in, plaintiffs in the Third Circuit who bring ERISA suits for breach of fiduciary duty will have to take it into account. Plaintiffs in the Ninth Circuit can ignore Confer. In other circuits, they take their chances on cases of first impression. It's certainly not free from doubt how any of the other Circuits might come down, but they'd be hard pressed to dismiss the logic of Kayser, which specifically considered all the arguments in Confer as well DOL Reg. Sec. 2509.75-8; Q&A D-3 and D-4. I haven't read the case in North Carolina you mentioned, but it's interesting that are plaintiffs willing to bear the costs of litigating an issue Confer tried to but to rest.

A quick check of Code Sec 457(f)(1)(A) reveals that the participant is taxable in the first taxable year in which there is no "substantial risk of forfeiture." Code Section 457(f)(3)(B) provides that a "subtantial risk of forfeiture" ceases to exist in the first taxable year in which the participant's right to receive a distribution is no longer conditioned on his performance of future services for the employer, i.e. he's vested in the benefit. If, under the plan, a terminated employee has the right to direct his former employer to "transfer" the benefit liability to a third party, it would be quite a stretch to argue that it remains subject to a "substantial risk of forfeiture."

KJohnson: The issue in Confer was whether corporate officers of the corporate plan sponsor, which was a named fiduciary under the plan, had fiduciary responsibility in the performance of their discretionary acts even though the company had not expressly allocated such responsibility to them. That's not quite the same issue as whether the corporate directors would have had such exposure. The Ninth Circuit clearly rejected that sort of test in favor of a purely functional test with repect to persons who exercise discretionary control over the plan. Under that test, it's virtually impossible for a corporate director who meets, confers, deliberates and votes to cause the corporation to exercise its discretionary authority as plan "trustee" over the management of plan assets to avoid being a "fiduciary." Kayes v. Pacific Lumber Co., 51 F.3d 14493d 1449 (9th Cir. 1995). In fact, Kayes, was cited in a subsequent Third Cicuit decision for that proposition. End of the Road ex rel. Fruehauf Trailer Corp. v. Terex Corp. , 250 BR 168 (2000). The Third Circuit appears to have limited Confer to its facts.

Corporations are creatures of state law. In prescribing rules of general application for the internal governance of a corporation, a state's law does not "relate to" an employee benefit plan and, therefore, doesn't come within the scope of ERISA preemption. There may be some states that have adopted trust law that exclusively regulate the persons/entities who may act in a trustee capacity with respect to employee benefit plans. (Modernly, most state legislatures are savy enough to avoid this preemption trap in drafting their statutes to fall within a preemption exemption.) Even though such a law, if any, arguably would "relate to" the plan, it would probably be exempt from preemption under the special "savings clause" in the Act. As a practical, as well as a legal, matter, the corporation can only act by operation of its board of directors or by persons to whom authority has been delegated by the board. Persons who are members of the board will invariably have, and eventually excercise, the discretionary authority or control over the plan that's described in ERISA's definition of a "fiduciary," even if the board's involvement is limited to engaging other fiduciaries, e.g. investment managers, third party plan administrators, or unrelated, i.e. corporate trustees. While these parties, and not the board, would have fiduciary responsibility with respect to the acts or failure to act that they undertake in the performance of their properly delegated fiduciary duties, the board would retain direct fiduciary responsibility for the manner in which it selected these fiduciaries and monitors their performance. It could also be exposed to co-fiduciary liability for the misdeeds of the other fiduciaries.

Your question relates to whether state labor law, i.e. the state in which the employee's services are performed, imposes PTO accrual requirements, i.e. an obligation to pay the accrued by unused portion on termination of employment or carry all or some portion of it over to the next year. Many states impose no such requirements. In a state such as California, the law is narrowly tailored to impose accrual requirements on "vacation pay," which is defined to exclude sick pay. To the extent, your program retains records that distinguishes between "vacation pay" and nonvacation pay sources of PTO, it seems like a stretch to apply the law to the nonvacation component. It goes without saying that you should confer with local labor counsel on this issue. If this doesn't eliminate your concern, you might consider recasting the vacation pay PTO as a self-insured ERISA welfare benefit plan (with all the attendant administrative burdens). Many employers in states with stringent vacation pay accrual requirements take the position that maintaining a VEBA as the funding vehicle for a vacation pay plan elevates it the status of a self-insured ERISA welfare benefit plan, rather than a mere payroll practice, thereby, subjecting the state law to ERISA preemption. Whether this is cost-beneficial depends on the cost of ERISA compliance plus establishing and operating the VEBA less the savings from avoiding the vacation pay accrual requirements under state law.

If your thought is to insulate an individual from the fiduciary liability of acting as the plan's "trustee," I don't think this strategy has much to offer, even if it is permitted by state trust law, unless the person you seek to shelter is not a member of the board of directors. Under a corporation's rules of internal governance (subject to state corporation law), a corporation can only act by appropriate resolution of its governing body, typically its board of directors. If the trust document designates the corporate plan sponsor as the "trustee," the directors would, in effect, act ex officio collectively as a board of trustees and each director would be exposed to fiduciary liability. It may be agued that since the trust document was adopted by a board resolution in the first place, it provides adequate notice of the directors' acceptance of their appointment ex officio, i.e. so long as they are directors. A director who prefers to avoid exposure to fiduciary liability would be well advised to resign. Even a director who recuses himself from board decisions that are arguably fiduciary in nature would not be completely insulated, since failures to act by parties who have the "authority" to exercise such discretion may well provide the grounds for imposition of fiduciary liability by a court, not to mention the recusing director's exposure to co-fiduciary liability for the acts or failures to act of his fellow directors. You should also bear in mind that the board may have delegated discretonary authority to one or more corporate officers to manage the administration of the plan and control plan investments. That delegation, irrespective of the appointment of the corporate plan sponsor as the "trustee," would not shelter that officer from exposure to fiduciary liability.

ERISA mandates that a covered pension benefit plan satisfy its trust, minimum benefit accrual, minimum vesting and a whole raft of reporting, disclosure and other requirements many of which are contrary to the principal goal of the plan in sheltering the executives from current taxation under the constructive receipt doctrine, codified in IRC Sec. 451 (with respect to taxable entities). Two types of plans are exempt from these ERISA requirements: "top hat" plans and "excess benefit" plans. A nonexempt plan cannot simultaneously satisfy ERISA's requirements and avoid the application of the constructive receipt doctrine. Thus, the pre-tax aspirations of the executives in a typical NQDC plan hinge on (1) the plan's exempt status under ERISA and (2) avoidance of the constructive receipt doctrine. For different purposes and in different contexts the Code and ERISA Title I each require that the plan be "unfunded." Read Rev. Rul 92-64 for general background on the IRS view of the meaning of this term as it relates to the establishment of a rabbi trust. Generally, the trust must provide that the assets of the trust are at all times subject to the claims of the employer's general creditors. Of course, to the extent participant's can directly control the investment of trust assets, they may well be deemed in actual, if not constructive, receipt. So it's important to design the plan so that the participant's investment choices are used as tracking devices by which the plan determines the hypothetical rate of return applicable to the account. When you consider allowing the plan to determine the hypothetical rate of return on a participant's account with the investment earnings/losses attributable to the participant's investment directions you are confronting the issue of "dominion and control." In the past, the IRS has not specifically said that the degree of the participant's "dominion and control" over the trust assets is a factor in determining whether or not the plan is "funded" for purposes of the constructive receipt doctrine. There is some old guidance from the Department of Labor that suggests it may consider this factor in analyzing whether a plan is "unfunded" for ERISA purposes. In light of this, it may be wise to consider designing the plan to impose administrative contraints on the ability of executives to execute investment transactions. One approach frequently used is to require that all investment directions be sent to the rabbi trustee, or other third party, for execution no more frequently than once a month.

Let's just say that the executives entitled to a distribution from an Enron nonqualified deferred comp plan at the time the company filed its bankruptcy petition will be treated like Enron's unsecured creditors. These benefit liabilities may well be discharged by the Bankruptcy court, or, at least, significantly diluted in terms of their potential value. I doubt these executives would take issue with your characterization.