May/June 2009 / Features
Executive Benefits Plans: Benefit Security in a New World
A change of control such as a corporate takeover has implications for executive benefit plans. Takeovers have a greater impact on participants in nonqualified benefit plans than qualified plans because nonqualified benefits are subject to the risk the plan sponsor’s insolvency.
A so-called rabbi trust allows a company to set aside corporate assets earmarked for (but not owned by) an executive nonqualified benefit plan and protects these assets from a change of control. Because trust assets remain subject to the claims of the company’s creditors, the executives are not taxed until the benefits are paid.
From the participants’ perspective, a funded rabbi trust provides security without triggering immediate taxation. Most voluntary deferred compensation plans with no informal funding or rabbi trust in place have less participation than similar plans with benefit security. To best protect against change of control exposure, the trust should be funded at a level sufficient to make the full benefit payment. Some companies choose to fund only the after-tax liability, because benefit payments will be tax-deductible to the company when paid, but this leaves nonqualified plan participants exposed in the event of a change of control. By considering these issues prior to a change of control, provisions can be put in place to protect executive benefits while meeting plan sponsor goals.
Attorney Matthew Cobb is a vice president with MullinTBG, an executive benefits, compensation and wealth management consulting firm.
