Contractual agreement to change Non-Qualifed arrangment?

[ERISAatty]

Strange situation here. Any insights, or suggested resources much appreciated.

A CEO of a company had a misunderstanding with the board of a company, and resigned. The board talked him into staying for a while (a couple of years), but at reduced compensation and with reduced CEO obligations.

As part of this arrangment, the board is reducing his compensation by $X0,000 per year, which happens to be the same amount that they would have contributed on his behalf to a profit-sharing plan, per year.

The CEO apparently is accustomed to his nice salary, and states that he can't afford to have his compensation directly reduced by $X0,000 per year.

So, the Board is looking at other ways to trim $X0,000 from his total compensation. We already know that the board can't just eliminate the profit-sharing contribution, since the profit-sharing plan is a qualified plan that requires any opt-out to be performed before at the beginning of the year, and not now (late in the year).

The CEO also has an undfunded Non-qualified deferred comp arrangement. Under the arrangement, the CEO may elect, prior to each calendar year, to elect compensation to the Plan, which is credited to his "account" during the February following each calendar year, but which is not payable until his termination. According to the agreement, CEO has an unsecured claim against the assets of the company for the credited amounts, and has no right to receive the amounts. There is a mere promise, by the company, to pay the amounts.

Here's my question. Assuming the CEO has already elected, prior to 2004, to defer money for 2004, can anyone think of any reason why it would be problematic for the CEO and Board to negotiate that now the CEO's 2005 nonqualifed plan credit (for work performed during the 2004 period) will be reduced by $X0,000 of the 2004 deferral? (I also wonder if this would be a material modification under ACJA).

I'm thinking there could be a possible contructive receipt issue - i.e., that the IRS might say he can't turn down that money. On the other hand, he doesn't, it would seem, really have a right to it, and I don't know why the CEO and Board couldn't "settle-up" their new compensation reduction in this way.

(Unless, of course, such agreement would be a material modification, which might trigger income inclusion, etc.)

Help.

[mbozek]

I think there is authority that an individual can waive a PS contribution at any time before the date the contribution is allocated to the individuals account because a waiver of a contribution before it is allocated is not a cutback under 411(d)(6). There is a 9th circuit case on when an allocation is deemed to occur. As for the NQDC issue why not wait for the IRS issues guidelines on Dec 21.

[ERISAatty]

Thank you, mbozek, for your guidance. FYI, I hear the IRS may issue regs tomorrow, so waiting on that point is a good suggestion.

For my understanding though, I'm trying to grasp the issues here vis a vis the nonqualified plan. I think this really all boils down to a constructive receipt question.

The nonqualified deferred comp agreement states that an unfunded amount will be credited to the CEO's "account," which he is then paid within 2 1/2 months after the year end.

The agreement states that the deferred money is unsecured, and is made on a "mere promise to pay" basis.

Given those facts, I don't see constructive receipt here. I conclude from the absence of constructive receipt that the CEO and Company could agree that he won't be paid the money after year end. (Although I have a feeling that the IRS would still try to say that the money should be treated as received after year end, so that he has to pay tax).

Does anyone have any constructive receipt insights out there? (This is not my usual area of work). Can an agreement like this be cancelled, or the amount reduced, ahead of payment of the full amount, such that the full amount won't be deemed taxable?

[Kirk Maldonado]

mbozek:

You said:

I think there is authority that an individual can waive a PS contribution at any time before the date the contribution is allocated to the individuals account because a waiver of a contribution before it is allocated is not a cutback under 411(d)(6).

If my memory serves me right, and it often doesn't, that guidance involved a plan where the participant had to be employed on the last day of the plan year to get an allocation. Accordingly, it is possible that the same result might not apply if the plan does not have that limitation.

[mbozek]

In Izzarelli v. Rexene, 24 F3d 1506 the 9th cirucit held that when allocation of a contribution occurred was to be determined under the plan docs, and did not occur when the contributions were made to the plan. Under Izzarelli, a plan amendment or waiver by the employee before there is an allocation of the contributions would not be a cutback.

[Kirk Maldonado]

mbozek:

Thanks for clarifying that.

I had this issue confused with when the IRS will rule that a plan amendment eliminating a contribution does not violate section 411(d)(6).

[ERISAatty]

Gentlemen, Thank you very much for the discussion and the Izzarrelli v. Rexene case site. Most helpful and appreciated!