Bankrupt investment alternative in NQDCP

[Guest RBJ]

My client has an account balance NQDCP. The plan provides that the value of accounts is determined by reference to various investment alternatives specified in the plan. One alternative is a mutual fund that is in bankruptcy. The independent fiduciary appointed to manage the fund while the bankruptcy is pending estimates that the value of the fund is approximately 90% of book value. Two participants, who have chosen this alternative have retired and are entitled to lump sum payments this year. The employer intends that a portion of the accounts representing post 2004 deferrals be grandfathered from the 409A requirements (not sure that really affects the answer to my question).

If the employer defers payment until it's rabbi trust receives payment from the bankruptcy estate, do I have a problem under 409A or prior law? I would like to argue that the provisions of the proposed regulations governing disputed payments would apply, at least by analogy. There is no guarantee that the mutual funds have any value at this point. I'm not at all comfortable that this is the type of dispute envisioned by the proposed regs.

[TCWalker]

Wasn't this a hypo investment? I think the risk isn't on those participants, it's on the Trust or employer.

[Guest RBJ]

Yes, it's a hypothetical investment. However, the return on the hypothetical investment dictates the amount payable under the NQDCP. We have no way of determining hypothetical value as of the distribution date because the investment by which the account is being measured may be worthless.