Do haircut provisions risk "funding?" What can a bankruptcy

[card]

If a NQDCP informally funded with a rabbi trust allows employee directed in-service withdrawals with a haircut (10-15%), is there a risk of plan benefits being taxed under the economic benefit rule, at least with respect to the top executives who might have the financial knowledge to foresee the employer's potential financial difficulties? Ie, would this render the plan "secured" for tax purposes since, it would be argued, there would no longer be an insolvency risk?

Thanks-

Rob [Edited by card on 09-24-2000 at 06:51 PM]

[Guest EAKarno]

The issue is really more one of constructive receipt rather than economic benefit. Tom Brisendine wrote an article exactly on the subject of haircuts in the Benefits law Journal in 1998 and concluded that a 10% haircut was probably safe. We generally design our plans for clients with a 10% haircut and would not feel comfortable with anything less. The reason being that the restriction would then be less than "substantial" and constructive receipt might, thus exist. As a safe-harbor I always mention that you could use 25% which is generally supported by the example in the Section 451 Regs. regarding constructive receipt.

[card]

Thanks. I agree constructive receipt should not be an issue if there is a substantial restriction on the withdrawal and I agree 10% is a comfortable level. However, the question I'm posing is slightly different- does the ability to withdraw funds at any time, even with a haircut, defeat creditors, thereby making the benefit "secured" and risking tax under section 83 and/or the economic benefits theory?

The Brisendine article addresses this only obliquely.

rob

[Guest EAKarno]

I cannot cite any direct authority, but I think your concerns can be alleviated by the bankruptcy fraudulent conveyance rules. For "insiders", any withdrawal within 12 months of insolvency would be subject to repayment at the order of the bankruptcy trustee as a fraudulent conveyance. For employees who are not deemed "insiders" the time frame is either 60 or 90 days. Thus, even with a haircut provision, participants are never really 100% safe from the reach of creditors of the employer.

[Guest wmacdonald]

I agree with the comments made earlier. The "haircut provision" is now being used in more plans than ever, and according to most, if designed properly, has little risk of having your plan funded. If you would like to get prevelance data, see http://www.crgworld.com,under "Publications", for a copy of a 2000 Executive Benefits Survey for the Fortune 1000. You can down load it free.