Transfer of NQDCP Liability?

[ERISAatty]

Here's a new one to me. Would be grateful for insights/comments.

An employer's stock is all held by a holding company. (Holding company has not other assets).

Employer sponsors an unfunded top-hat plan (and has informally set aside some money with which to pay obligations under the top-hat plan, but this money is not held in a trust, and is subject to its general creditors).

Employer would like to "transfer" the liability (AND the money) to the holding company (and have the money used for another purpose).

Employer hopes to replenish its own informal funding for liabilities under the Plan, but, if an unexpected payment event occurs prior to this replenishment, employer is hoping not to have to pay under the Plan.

The issues I see here are that:

1. A plan is only 'unfunded' to the extent that any amounts related to it are available to the employer's general creditors, and that the money is not formal set-aside under the plan

2. The employer's transfer of the 'liability' to the holding company would not 'per se' "fund" the unfunded plan, but would also not relieve the employer of its obligation to pay under the plan. (Employer is hoping that by transferring the 'liability' to the holding company [and by amendment the plan to permit Board to do this], then if the holding company doesn't have assets to pay, then payments are not made).

3. My reaction is that the employer's assumption that employees may look to a certain transferred pool of money (only) as the source for their plan benefits is what, in fact "funds" the plan, and would make the plan subject to the substantive provisions of ERISA.

4. Employer can 'transfer' liability all day long, but if it still pays up when amounts are due (without regard to such transfer), then plan remains unfunded.

Anyone agree, disagree, see other issues?

Thanks!

[Ron Snyder]

Your "facts" are somewhat confusing and inconsistent. The employer presumably can do whatever it wishes with its assets, even if those assets were formerly set aside for payment of deferred compensation. Those benefits are not "funded" or vested at this time.

The transfer of the liability is a little trickier. What is the nature of that transaction? An outsourcing agreement that says we hereby give you x $ in exchange for your assuming the promise to pay the deferred compensation benefit to our employee? Just when I think I have understood the transfer of the liability, you state that the "Employer hopes to replenish its own informal funding * * *". Why would the employer do this if the liability now belonged to the holding company?

IMHO, the "employer's transfer of the 'liability' to the holding company" may or may not relieve the employer of liability, depending on how it is structured. However, since the employer and the holding company seem to be a controlled group, it may not matter.

Top hat plans are not subject to ERISA; they are specifically exempted. This is true both of unfunded as well as funded or partially funded programs. The question is whether or not the benefits are immediately taxable to the executive, and that depends on the executive's interest in and/or control over the fund.

You haven't indicated the purpose(s) of the proposed transaction. What is the employer trying to accomplish?

You ask for other issues: what about a scenario where the employer transfers both asset and liability to the holding company. Employer doesn't accumulate additional funding for the benefits. Holding company wastes the funds received on other activities. Retirement time comes for executive, and the employer/holding co. both say sorry, you're SOL. Executive sues, obtains judgment and takes controlling interest in employer.

[Peter Gulia]

ERISAatty, if your inquiry is about an existing deferred compensation plan or agreement, look at what that contract language says, and if it's not there consider what the relevant law of contracts is.

When I advise an executive who is negotiating her deferred compensation, I sometimes advise that she insist on a clause affirmatively stating that her counterparty cannot assign any right and cannot delegate any performance. Rather, the contracting parties may change a right or obligation only under a complete novation.

Admittedly, asking for a nondelegation provision isn't exactly necessary, because a delegating party remains liable for the performance delegated. See Restatement (Second) of Contracts section 318 (1981). But sometimes it helps to put the text in the contract: if the employer might imagine anything of the kind you've described, an express provision might remind the employer about the obligations before the executive would have to "go to law" to enforce the promises due her.

If you advise the employer, consider that a delegation, even if not precluded, does not end the delegating party's obligation of performance (that is, the obligation to pay the promised deferred compensation).

[ERISAatty]

Thanks for the responses. (The Contract cite was particularly helpful!)

After posting, I received additional information from the client (which is a bank), which I share just in case anyone else faces this question/situation.

The bank is limited in its ability to transfer money to a holding company due to some restrictions imposed by the OTS (Office of Thrift Supervision). The goal was to transfer bank $$ to the holding co. (under common control with the bank) in order to service a debt held there. Clearing that debt would allow the bank to be permitted (by OTS) to again issue dividends. The dividend $$ would have been used to replenish the informal funding related to the plan.

Just moving the $$ to the holding co. wasn't permitted by OTS (would be viewed as issuing a dividend, which isn't permitted until debt of holding co. is cleared). So they thought maybe if they could also transfer the top-hat plan liability WITH the $$ it would work.

I drafted a memo stating that, in the end, the 'transfer' of liability wouldn't relieve bank (or any controlled group member) of liability for the top-hat benefit obligation, short of the insolvency (or risk to 'going concern status') of the control group entities. I also pointed out that transferring the money AND liability risks causing the plan to be deemed 'funded.'

OTS agreed that transfering liability wouldn't really relieve the bank's obligation to pay the promised benefit.

Bank decided not to pursue this course.