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TRANSFER OF NONQUALIFIED DEFERRED COMPENSATION PLAN ASSETS


Guest ron b

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Guest ron b

CAN A PARTICIPANT IN A NONQUALIFIED DEFERRED

COMPENSATION PLAN IN ONE COMPANY TRANSFER HIS PORTION OF THE ASSETS WHEN THE PARTICIPANT LEAVES THAT COMPANY TO A SIMILAR NONQUALIFIED DEFERRED COMPENSATION OF ANOTHER COMPANY WITHOUT TRIGGERING AN IMMEDIATE TAXABLE EVENT.

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Guest BobParks

If the plan is funded "his portion of the assets" it would be covered under ERISA, therefore it would not be "nonqualified."

I don't think the participant should have any interest in any asset. Since he doesn't have any interest there wouldn't be anything to transfer.

He might be vested in the right to an income at some point in time but that is merely an unsecured promise at best.

What makes you think it is "nonqualified" and that the participant has a "portion of the assets?"

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Assuming that the plan is merely an unfunded and unsecured promise by employer #1 to pay deferred comp in the future, then, as a legal matter, there are no "plan assets." You would analyze the incidence of taxation under the "constructive receipt" rules of Code Section 451. It may be difficult to argue that the "substantial risk of forfeiture" did not lapse when the the plan granted the terminating employee the right to have rabbi trust assets transferred to an unrelated successor employer. Clearly, the assets would no longer be subject to the claims of the creditors of the former employer and plan sponsor. One approach you could consider requires the former employer and the terminating employee consenting to the cancellation of the employee's accrued benefit on the condition that employer #2 provides an equivalent increase in the accrued benefit under its plan. In exchange for the discharge of the benefit liability, the former employer agrees to pay employer #2 in kind with the rabbi trust assets in question.

I don't think the IRS has ever visited this issue and you probably don't want to the first taxpayer to raise it in the form of a transfer of rabbi trust assets.

Another significant risk factor is the issue of whether the plan is "ERISA funded." The courts and the Department of Labor have applied principles akin to dominion and control under the economic benefit doctrine for purposes of determining if the plan is ERISA funded. Giving the employee a right to direct the rabbi trustee of employer #1 to transfer assets to an unrelated employer, seems to raise the high bar for the plan to avoid this result.

Phil Koehler

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  • 2 weeks later...
Guest LRichey

There is much we do not know here. But there is the possibility to achieve the effect of a rollover that does not involve the transfer of any assets. Have the particpant take down the plan income (which is probably what is required by the plan on termination anyway)to live on currently and then defer everything possible under the new employer's plan. This may require a special dispensation on plan deferral limits by the new employer. In addition, if the existing amounts are large compared to new compensation, it might not be accomplished in a single year. However, this technique would be consistent with tax law.

Side issues: Would deferral of most compensation negatively impact any other benefits (qualified plan benefits?).

As Bob mentioned, the company may be holding assets in connection with their liability to the participant, but the participant can have no ownership, actual or beneficial in them. Therefore, playing with the assets can not only be risky for the particpant in question, but all the participants in the plan if any action by the employer suggests or evidences the plan is "funded" for ERISA or tax purposes.

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This basically doesn't work. You can't rollover non-qual money; there is constructive receipt. You have to pay tax on it or leave it where it is.

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