ERISA-Ninth Circuit Holds That A Top Hat Plan Of An Insolvent Employer Could Not Distribute Its Funds To Its Participants

In Community Lending, Inc. v. Becker, Nos. 09-15302, 09-16191 (9th Cir. 2010) , the Court faced the issue of whether a plan of deferred compensation (the “Plan”) could distribute its funds to the participants, even though the employer maintaining the Plan was insolvent. The plaintiffs were the Plan participants, and the Plan was a “top hat plan” for ERISA purposes. ERISA defines a “top hat plan” as one which is unfunded, and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. To be “unfunded”, the Plan included numerous provisions stating that all employee contributions remain subject to claims by the company’s creditors in the event of insolvency. Specifically, Article 10.6 of the Plan states that the “vested Account balance of a Participant shall be paid from the Trust only to the extent the Employer is not at the time of payment insolvent.”

In this case, the employer may have been insolvent, but had terminated the Plan. This raised the question as to whether the “no payment if insolvent” rule of Article 10.6 still applied. The Court held that the rule did still apply. A payment by the Plan, while the employer was insolvent, would cause the Plan to lose its unfunded status. Article 10.2 of the Plan governs plan termination, and that article expressly states that the Plan is intended to be an unfunded top hat plan. By including this language in Article 10.2, the Plan’s drafters explicitly provided that the termination provisions cannot be applied to jeapardize the unfunded status of the Plan. In accordance with the parties’ express intent to create an unfunded top hat plan, Article 10.6’s prohibition on distributing the Plan’s assets when the employer is insolvent must be interpreted to apply even in the event of plan termination. Thus, the Court held that the Plan could not distribute its funds, if the employer was in fact insolvent. The Court remanded the case to the district court to consider the involvency question.

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