Non-account balance plan value in liquidation

[EBECatty]

In the context of terminating and liquidating a deferred compensation plan, does anyone have advice or a good rule of thumb for valuing the liquidation payments to participants in non-account balance plans where the ultimate benefit (had the plan continued) would be uncertain?

For example, a 45-year-old participant who must work until age 60 to vest, at which point she would receive fixed installment payments for, say, five years?

Would you discount the liquidation value not only for time, but also likelihood of reaching vesting?

Appreciate any insights.

[CuseFan]

Check the document and/or SERP agreement and/or any other related forms, a well-drafted set of documents would answer most of these. If the plan calls for full vesting upon plan termination then I don't see how you can discount for vesting probability. Interest and mortality assumptions play a big part as well and should be specified somewhere, even if through reference to a qualified DB plan, if any.

For the 45-year-old, I would calculate the current (distribution date) LSPV of the accrued 5-year installment benefit payable at age 60 or whenever the benefit could actually be payable.

Make sure you comply with the 409A plan termination accelerated payment rules, terminating all like plans and paying benefits within the specified window period.

[EBECatty]

Thanks CuseFan.

Unfortunately, the plan doesn't provide any specific guidance on how to handle, only a provision that no vested benefits will be reduced (although it does not affirmatively vest anyone who is unvested) upon termination of the plan. 

I suppose the upside of the lack of a clear rule is that leaves some flexibility in the formula used on plan termination. 

The 409A termination and timing rules are not an issue, just the formula. 

[Luke Bailey]

EBECatty, obviously there are always more facts and circumstances, but based on what you have described I would consider trying to come up with what I considered a reasonable interpretation (including filling in any gaps if the document is flawed, as seems to be the case), and then getting the participant to agree that's all she or he is owed. Not ideal, of course. There is, in essence, a latent "bona fide dispute" about what is owed, of the type described in Treas. Reg. 1.409A-3(j)(4)(xiv).

[CuseFan]

Agree with Luke, whatever assumptions are used should be fair and reasonable. Getting signed releases on agreement of benefits might be worthwhile. The NQDC plan is ultimately a contract between the employer and employee, and litigation from a disgruntled employee thinking they might have been shorted is obviously something you want to avoid. As for assumptions, without any plan defined parameters maybe apply the ASC assumptions, assuming they had to report this liability on their financial statements.

[EBECatty]

Thank you both for your thoughts; appreciate it.