Washington Report (November 13, 2015) Ponte Vedra Beach, Florida
Acceleration of Benefits following Nonqualified Benefit Plan Terminations SUMMARY: This continuing series of articles is intended to provide deep insight into trends, events, and issues that impact the design and operation of nonqualified executive benefit plans (sometimes referred to as Top Hat plans). We occasionally highlight court cases that may be relevant to our clients. In this court case, the 11th Circuit held that the termination of a nonqualified deferred compensation plan and acceleration of the participant's annuity benefits to a present value lump sum does not "adversely affect" the participant's benefit. The court concluded that the fact that the lump sum payment results in accelerated as well as potentially higher taxes to the participant does not give rise to a claim under the Employee Retirement Income Security Act ("ERISA"). CITATION: Taylor v. NCR Corp., No. 1:14-cv-2217-WSD (U.S. Dist. Ct. N.D. Ga., Sept 23, 2015); Holloman v. Mail-Well Corp., 443 F.3d 832 (11th Cir., 2006). RELEVANCE: This case exemplifies the importance of carefully drafting plan documents. Here the court analyzed and followed the plan documents that permitted the plan to be terminated as long as it did not "adversely affect" accrued benefits. Importantly, the court concluded that a deferral of compensation is not a protected benefit under ERISA.
FACTS: Plaintiff, Keith Taylor was a 21-year NCR employee. In 1999, he became a participant of NCR's nonqualified "top hat" plan for senior employees. Mr. Taylor retired in 2006, electing a 100% joint and survivor life annuity benefit, with an annual benefit of approximately $29,000. In 2013, NCR terminated the plan and paid Mr. Taylor a lump sum of approximately $440,000 representing the actuarially calculated net present value of the life annuity. After state and federal income tax withholding, Taylor received $254,063. The plan documents allowed the plan to be terminated provided that "no such action shall adversely affect ... accrued benefits..." Taylor sued, arguing that the termination of the plan "resulted in a 52.5% reduction ..." of his benefit, due to adverse tax consequences and the 5% discount rate applied to calculate the net present value. He contested the application of any discount rate at all, but did not argue that the 5% was the wrong rate. NCR filed a motion to dismiss. The court dismissed Taylor's claims finding that: 1. NCR was permitted to terminate the plan under the terms of the plan document,; 2. The tax impact is not an ERISA protected benefit; and 3. Using a discount rate to calculate the present value of a future benefit is not a reduction of benefits and therefore, does not "adversely affect ... accrued benefits" in violation of the plan documents. Citing Holloman v. Mail-Well Corp., the court concluded that applying a discount rate to calculate the present value of future payments is simply a sensible way of calculating the real value of the benefit, not a reduction.
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Disclosures Fulcrum Partners does not provide legal, tax, and/or accounting consulting and/or advice. We have provided you with this material strictly in its capacity as an employee benefits consulting firm. The information contained herein is based on our interpretation of the existing Internal Revenue Code, and the application of relevant statutes, regulations, court rulings, and familiarity with this material as it currently exists. Based on the legal and accounting complexity of employee benefit issues, along with the changing statutory and regulatory environment, we strongly recommend that you consult with, and seek the advice of, your legal and/or accounting advisor(s) regarding this material. Securities Offered Through ValMark Securities, Inc. Member FINRA, SIPC, 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431* 1-800-765-5201. Investment advisory services offered through ValMark Advisers, Inc., an SEC Registered Investment Advisor. Fulcrum Partners LLC is a separate entity from ValMark Advisers, Inc. and ValMark Securities, Inc.