Transferring Deferred Compensation Plan Liability to Another Entity

[HCE]

Entity A has a Nonqualified Deferred Compensation ("NQDC") Plan.  For one particularly highly paid employee ("Employee A"), Entity A is worried about having Employee A's NQDC liability on their books.  Entity B has ties to Entity A, but is not in the same controlled group (you could call the entities affiliated).  Can Entity A transfer Employee A's NQDC liability to Entity B, while also transferring the portion of the Rabbi Trust that holds assets needed to cover Employee A's NQDC interest to Entity B?

One concern I have is that Entity A's creditors may not like the fact that Entity A is giving up assets (the Rabbi Trust holdings) at the same time they are getting rid of an unsecured general creditor.  From a secured creditor's viewpoint, this isn't exactly positive.

I welcome any thoughts, comments, answers.  Thanks in advance!

[Peter Gulia]

Consider whether the executive has or lacks a right to prevent an assignment or other change of the deferred compensation obligation.

The executive’s lawyer might advise her not to assent to a novation, transfer, assignment, or other change unless (at least) (i) the next obligor is more creditworthy than the current obligor, and (ii) a law firm with assets available to pay on a malpractice judgment addresses to the executive a written opinion that the change does not result in a loss of a deferral or another unwelcome tax consequence.

Entity A might evaluate whether the proposed change could breach a duty or obligation Entity A owes to any of A’s creditors.

Entity B might evaluate whether an increase in its debt, even if it is a contingent obligation, and even if there would be a corresponding increase in assets, could breach a duty or obligation Entity B owes to any of B’s creditors.

[Luke Bailey]

Pre-409A, I would have said that as long as the executive agrees, it has no tax consequences to him/her. Also, transactions like this are done in the context of acquisitions and spinoffs of assets.

But this is not an acquisition or spinoff, apparently.

After 409A, I'm not sure. I don't think this would cause an accelerated payment (assuming that the obligation is unsecured either way), but most of 409A's rules are stated in terms of service provider and service recipient, and now the obligor will not be the same person as the service recipient, so I would need to give that some thought and run through all of the 409A rules and definitions to see how they would work in this circumstance.

Agree on the business issue regarding A's creditors, but unless A is going to become bankrupt shortly, it should not be a fraudulent conveyance, so if it is a problem it should be a problem under A's financing documents, which you should be able to review to see if any covenants are breached.

Speaking of bankruptcy, if A is weaker than B financially, could this not be viewed as in effect funding. I don't know. Again, review 409A carefully on this point. IRS has not yet proposed regs on 409A funding.

Also, how would B treat the receipt of the assets for tax purposes? Isn't it income to B? I don't think B is going to be able to offset the payment obligation to avoid the income, because 404(a)(5) says no deduction until the executive has income. Also, make sure that A is going to get a deduction on the transfer, because presumably it won't when B pays the executive.