When is a plan “unfunded” for purposes of ERISA? The answer to this question can have important implications. For example, a “top hat” plan, usually a plan established for upper level employees, is not subject to the participation, vesting, funding or fiduciary provisions of ERISA. However, a plan will not be treated as being a top hat plan unless it is “unfunded”. A court had the opportunity to consider whether a plan is unfunded, and thus a top hat plan, in Precious Plate, Inc. v. Russell, No. 06-CV-546C (W.D. NY 2011).
This case involved a deferred compensation/split-dollar life insurance plan (the “Plan”) entered into between the plaintiff (the employer) and defendant (the employee), and the Plan’s underlying life insurance policy, agreements and assignments. In general, under the Plan, the life insurance policy insured the life of, and was owned by, the defendant. The plaintiff would pay the premiums on the policy. In consideration of these premium payments, the defendant assigned the policy to the plaintiff as collateral. Upon the defendant’s death, the plaintiff would collect the policy proceeds, pay a portion of the proceeds to the defendant’s beneficiary, and retain the remainder. If the defendant terminated employment, the entire policy would become the plaintiff’s property. The defendant terminated employment, and the plaintiff brought this suit to enforce the Plan’s termination provision. If the Plan was “unfunded”, and thus a top hat plan, then the plaintiff would not be hindered in its efforts by ERISA’s fiduciary requirements.
Examining the facts and the law, the Court said the following on the “unfunding” issue. The Court notes that neither the split-dollar agreements nor the assignments contain any specific language stating that the policy proceeds are general assets of the plaintiff, that the plaintiff’s or defendant’s rights in the policy are those of an unsecured creditor, or that the Plan is an unfunded top-hat plan. Nonetheless, considering the language of the assignments and the split-dollar agreements, the Court finds that the Plan is unfunded. The plaintiff has the sole right to collect the policy proceeds at death or maturity or to surrender the policy for its cash value. While the plaintiff is contractually obligated to pay the agreed upon death benefit to the defendant’s beneficiary, the beneficiary may not look to a separate res for payment of the benefits. Once the plaintiff has collected the policy proceeds, those funds become part of the general assets of the plaintiff (a corporation). The defendant’s beneficiary’s claim to defendant’s share of the policies is a claim against the plaintiff/corporation, not the insurance company that issued the policy. As such, the defendant has no rights greater than any unsecured creditor to a specific set of funds that finances the Plan. Accordingly, the Court finds that the Plan is an unfunded “top-hat” plan for purposes of ERISA.