An executive top-hat plan can be a great way to attract and retain highly qualified executives or supplement a business owner’s compensation, but the plans have a big downside. Because the plans are generally unfunded, major events at the sponsor, like a sale or insolvency, can devastate a plan and leave participants empty handed. The effect on a top-hat plan when a sponsor liquidates its assets is illustrated by the recent Seventh Circuit Court of Appeals case, Feinberg v. RM Acquisition LLC, 629 F.3d 671 (2011).
The top-hat plan at issue in the case was a Rand McNally & Company Supplemental Pension Plan (“SERP Plan”). The plan provided an annuity to plan participants when they reached retirement age.
Rand McNally filed for bankruptcy in 2003, which was prior to the events precipitating the Feinberg case. The SERP was left “unimpaired” by the bankruptcy—debt created by the plan was not modified or discharged by the bankruptcy.
In 2007, RM Acquisition purchased Rand McNally’s assets and agreed to meet some, but not all, of its obligations. Essentially, the sale stripped Rand McNally of its assets, leaving a shell.
Although a sale of assets like this one won’t usually gut a qualified deferred compensation plan, since most such plans are funded, the plan at issue in this case was an unfunded, non-qualified deferred compensation plan.
Nonqualified deferred compensation plans offer businesses and their executives a tradeoff: although such plans can defer income tax liability on some executive income, the plans generally aren’t funded, meaning that creditors of the business have access to plan assets. So, if a company goes bankrupt or otherwise ceases to exist, plan funds can be siphoned off to pay the company’s creditors.
When a buyer purchases all of a company’s stock, the purchaser takes on all of the company’s debts—including liabilities of any non-qualified deferred compensation plans. But in a case like this, where the sale just liquidates the company’s assets, liabilities often don’t get transferred as part of the sale.
The SERP in this case was left in Rand McNally—which was a shell with no assets after the