Participant-Directed Top Hat Plans

[Guest GARNETT]

What do members of this group think about a

top hat plan funded by a rabbi trust that

permits participants to make daily investment

selections among a family of funds selected

by the trustee? While the trust document

contains language that these are only

"deemed" investment elections, in reality

the trustee will never evaluate these

decisions and, in fact, will never even know

what decisions have been made because the

participants contact the custodian of the

assets directly, i.e., there is no procedure

by which the trustee reviews the decisions.

Doesn't such a plan constitute a "funded"

plan for purposes of ERISA? If not, why not?

Thank you very much for your comments.

[Guest LRichey]

Your design would appear to be a higher risk design with regard to the ERISA "funding" question. Contrary to some opinion, "funding" for ERISA purposes and income tax are not exactly the same. Assuming that the language in the plan document makes the assets subject to the general claims of creditors, and it also contains a provision that the Trustee is not required to follow the investment directions of the Trustee, additional special disclaimers in the communication would be required to use this design if it is to be used. I have just completed an article on this very issue. Email me if you wish a copy. I can also recommend one on the income tax issues written by Tom Brisendine.

[Kirk Maldonado]

I disagree strongly with LRichey. As long as the assets of the Rabbi Trust are subject to the claims of the employer's creditors, the plan is not funded, regardless of who has the investment discretion. The IRS dropped that argument many years ago. There are PLRs right on point saying that participants can direct the investment of the assets of the Rabbi Trust.

[Guest]

I agree that this is permissible and doesn't make the plan funded.

[Guest halka]

Kirk: Although the IRS has not recently argued the "economic benefit" of participant direction of NQDC plans, I haven't seen any official notices or PLRs on the IRS position. Could you list a couple of the on-point PLRs that you mention? Thanks very much.

[Kirk Maldonado]

PLR 9332028.

[EGB]

In August 1998, I spoke on the telephone with Kate Fernandez at the IRS about this issue. (She was supposedly instrumental in drafting the model rabbi trust). I asked her whether participant direction is allowable under a rabbi trust. She said "absolutley not" and that the model trust makes it clear that this is not allowed by stating, "The trustee must be given some investment direction, such as the authority to invest within broad guidelines established by the parties . . ."

[EGB]

Kirk - was 9332028 an incorrect citation?

[Guest LRichey]

Kirk and Other Writers:

This discussion is interesting on the TAX ISSUES, which I did not comment on in my response. However, the question asked was directed at the "ERISA problems" in the design (a plan must be "unfunded", as well as limited to a select group to claim the ERISA safe-harbor exemptions).

As this discussion sequence proves, the two "unfunded" definitions issues are frequently confused, but must be reviewed independently because they are not the same. I suggest we help our writer out by focusing on the question asked, although I'm sure this discussion re:"unfunded" issue for income tax purposes is useful.

[Kirk Maldonado]

Beth:

The model trust is only relevant if you want a PLR on a nonqualified deferred compensation plan. The IRS can be as conservative as it wants in imposing conditions upon when it will issue a PLR. That does not mean that the IRS would take that position in litigation or that a court would uphold that position. It's just a price you have to pay if you want a PLR. That's why extremely few employers request PLRs on deferred compensation plans.

[Guest GARNETT]

Test