Can we divide a NQDC Plan and transfer a portion to an unrelated company?

[HCE]

Here is our situation:

Company A sponsors a NQDC Plan.  It later split into Company A and Company B.  Several years ago, Company B was sold (no longer related to Company A), but the sale did not trigger payments under the NQDC Plan due to the "same desk" rule.  However, now we have a problem where Company A is sponsoring a plan that still contains Company B employees.  Company A has to rely on Company B for things like informing when one of the Company B participants has a separation from service.

Company A would like to divide the plan and send the Company B portion to Company B.  At that point, Company A doesn't care what happens to the Company B portion -- Company B can administer the plan itself, or it can terminate it.

Obviously this should have been done at the time Company B was sold, but it wasn't.  So, is there any problem with doing this?  Since Company B is the true service recipient here, it seems legit.  But I can also see the potential for abuse here -- giving a NQDC to a different company to terminate so other plans aren't aggregated with it and don't also have to be terminated.  Has anyone run into this issue before or have any advice?

 

[Luke Bailey]

I have structured transfers of NQDC obligations in corporate transactions in situations that are generally similar to what you describe, HCE. It has been my prior conclusion, where I had all the facts, including documents (which of course, I do not have for your case, HCE, so I am speaking only generally and hypothetically in addressing the general question you have asked, not your specific situation) that the mere transfer of the obligation to pay the NQDC from one service recipient to another did not facially violate some federal income tax rule, e.g. constructive receipt of economic benefit. The complexities from a tax point of view are in connection with the transfer of any assets used to informally fund the obligations, such as a rabbi trust or life insurance policies, and those issues need to be reviewed carefully before pulling the trigger on any transfer. There is also an issue regarding the employees' rights regarding the change in the identity of their obligor, which may to some extent depend on the plan document.

[HCE]

31 minutes ago, Luke Bailey said:

I have structured transfers of NQDC obligations in corporate transactions in situations that are generally similar to what you describe, HCE. It has been my prior conclusion, where I had all the facts, including documents (which of course, I do not have for your case, HCE, so I am speaking only generally and hypothetically in addressing the general question you have asked, not your specific situation) that the mere transfer of the obligation to pay the NQDC from one service recipient to another did not facially violate some federal income tax rule, e.g. constructive receipt of economic benefit. The complexities from a tax point of view are in connection with the transfer of any assets used to informally fund the obligations, such as a rabbi trust or life insurance policies, and those issues need to be reviewed carefully before pulling the trigger on any transfer. There is also an issue regarding the employees' rights regarding the change in the identity of their obligor, which may to some extent depend on the plan document.

Luke -

Thanks for the advice!  You mention transfers in corporate transactions -- I would have less concern if we had transferred the obligation at the time of the transaction, but does your answer change since we are doing this a few years removed from the transaction?

[Luke Bailey]

HCE, I think absolutely, that presents additional complexities and potential roadblocks.