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Bankruptcy Risk - Subs & Parent Companies


Guest Mariko

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Guest Mariko

It is my understanding that the substantial risk of forfeiture associated with NQDCP is tied to the Plan Sponsor even if that Plan Sponsor is a subsidiary of a larger parent.

1. So, does this mean that if the Sub goes bankrupt and the Parent remains solvent, that participants risk forfeiture?

2. If the Parent goes bankrupt, does this mean that the Sub has de facto gone bankrupt also and that participants risk forfeiture?

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u need to check with bankruptcy counsel but the anser to 1 is yes unless the parent also guaranteed the benefits. I think the answer to 2 depends on the relationship of parent and sub. If p owns 100% of S then sub is a asset of P and will be sold to satisfy P'd debts. Whoever buys S buys S obligations including DC lan payments.

mjb

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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.

Phil Koehler

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