Parent vs. Subsidiary Sponsorship of Plan

[SycamoreFan]

A client presently sponsors a non-qualified deferred compensation plan at the level of one of its subsidiaries. Plan is designed to be 409A-compliant. No rabbi trust or other funding vehicle is used, but cash and liabilities are kept on the books of the sub. Company would like to move the assets and liabilities for the plan to the parent company level for business purposes that are unrelated to the plan. Any issues under 409A or pre-409A income tax doctrines (i.e., constructive receipt or economic benefit)?

My thinking and analysis is that there is no issue here. 409A's restrictions on funding are not implicated here. Also, no issue is presented under constructive receipt or economic benefit doctrine because the plan benefits are still subject to the claims of the parent company's creditors, and while the benefits may be slightly more or less secure depending on financial position of parent, there is still a substantial limitation on the right and it is subject to the claims of creditors of the parent company. I'm not aware of IRS guidance that directly addresses this issue.

[XTitan]

I'm not a corporate tax guy, but my understanding is that (depending on the structure) that upstreaming the assets may be treated as a taxable dividend to the parent.

[Peter Gulia]

Beyond considering how a change might affect a participant's tax treatment and each business organization's tax treatment, consider how much right the plan's sponsor has (or lacks) to change which person is obliged to pay the deferred compensation.

Although an employer might seek broad powers, sometimes a well-advised participant succeeds in negotiating one or more provisions that restrain her employer from changing terms without the participant's consent.