Ten days ago, I blogged on two types of litigation that regularly arise over employer’s non-qualified deferred compensation plans. That post and the two that followed focused on litigation by former employees who left before becoming eligible for vested benefits alleging that that they should have been vested and received benefits because the plan did not qualify as a top hat plan, exempt from ERISA. However, I promised to discuss a second type of recurring top hat plan litigation: claims by former plan participants who received their benefits, but not at the time or in the forms they elected, alleging damages due to adverse tax consequences.

A client will ask from time to time whether it can terminate its non-qualified plan and pay out all participants’ benefits in a single lump sum despite participants’ elections of other forms (and timing) of benefit. The answer has always been – and continues to be, as two recent federal court cases reached the opposite result on this question – “it depends.”

One case, Taylor v. NCR Corp. (N.D. Ga. 2015), found that the employer did not violate the terms of its non-qualified plan deferred compensation plan when it terminated the plan and paid out participants’ benefits in a single lump sum. The other, Gill v. Bausch & Lomb Supplemental Ret. Income Plan I (2d Cir., unpublished), found that the employer did violate the terms of its supplemental executive retirement plan when it terminated the plan and paid out each participants’ benefits in a single lump sum. In the second case, the court awarded significant damages and attorneys’ fees and expenses of $730,106.30 (not payable from rabbi trust)to the “aggrieved” participants.

Space limitations prevent me from discussing both cases at length. However, in neither case was it alleged that the employer had cheated participants out of their hard-earned benefits. Rather, the claims were that the early termination and payout resulted in tax consequences that did not meet the participants’ expectations. The only significant differences between the two cases are that:

  • the case won by the employer involved an individual account deferred compensation plan, and the case the employer lost involved a defined benefit-like supplemental executive retirement plan, and
  • the case the employer won had more precise language in the plan document as to the employer’s ability to terminate the plan.

The moral of this story is that employers should review (and, where necessary, improve) the plan termination language in their non-qualified plan documents and that employer-sponsors of SERPs need to be even more cautious than deferred compensation plan sponsors.