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About a month ago, I wrote about a court case in which an incompletely worded 409A (nonqualified deferred compensation) plan document caused the court to award an executive more money than his previous employer thought he was entitled to. You can read my original piece on Graphic Packaging v Humphrey here: http://johnhlowell.blogspot.com/2010/12/its-extremely-important-to-have.html .
I've read more of these sorts of documents than most of you would prefer. And, the good news for employers is that most executives don't read those documents as carefully as I do. The bad news is that most that I have read do not satisfy (in some situations) the concept of definitely determinable (stealing the term from the qualified plan world).
What does that mean? The words speak for themselves ... I think the lawyers would call that res ipse locutur, although literally that means the thing speaks for itself (I see now why I took Latin in school about 40 years ago). For a benefit to be definitely determinable, a person should be able to read the plan document and know what the amount of that benefit will be.
Let's return to 409A documents. If you've made it this far, there is a good chance that you know that "specified employees" (generally the highest-paid executives (not more than 10% of the company) making at least $150,000 as indexed, but it's actually far more complicated than that) may have a 6-month delay before than can receive certain benefits under a 409A plan.
Let's consider a simple situation. Suppose Ebby Scrooge is the CEO of No Holiday Corporation. Ebby retired just the other day on December 31, 2010. He had earlier made a bona fide initial deferral election in his SERP to take his benefit in a lump sum at termination (or 6 months later if he was a specified employee). Ebby's lump sum on December 31 would have been $10 million, but he was a specified employee.
Poor Bobby Cratchit needs to process the payment to dear old Ebby. He has a quandary -- how big should Ebby's check be? Does the $10 million get interest at some rate from December 31 until mid-2011? The plan document doesn't say. Does it get calculated using 12/2010 interest rates or 6/2011 interest rates, or some other rates? The plan document doesn't say. Does the annuity factor get calculated using Ebby's age as of 12/2010 or as of some other date? The plan document doesn't say.
Get the picture? In Humphrey, the 11th Circuit Court of Appeals (based in Atlanta and covering Alabama, Florida and Georgia) found that where the plan document (written by or under the control of the employer) is not clear, uncertainty should be decided in favor of the participant. Oops!
What do your plan documents say? Do you know?
I am about to be perhaps a little bit critical of some attorneys who write these plan documents. I'm sorry, some of you are my friends (but of course, my friends couldn't be the ones who are doing less than perfect work). Very few attorneys have ever worked in plan administration. They don't consider whether the language that they write is easy to administer, difficult to administer, or anywhere else on the spectrum. For many, it's just not in their DNA. Surely, you will see in the document that where found in the document, the male is to be considered the female and the singular the plural, but that inconsequential stuff about how much to pay the executive -- nowhere!
What's my suggestion? Attorneys are best at the legal mumbo jumbo, but where a plan must be administered, a company may save itself a lot of money by paying a little bit (relatively speaking) to have some non-attorney such as this author review the document to see if it can be accurately administered. Looking back to Ebby Scrooge, if it's an issue of a 5% annual rate of interest, then the increase in payment amount for the 6-month period would be $250,000. Of course, in some cases, the employer may not have the right to unilaterally amend this document, but that's an issue for another article on another day.
In the meantime, I'd love to take a look.
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