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5500 Preparer's Manual for 2012 Plan Years

5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.

CCH® PENSION — 12/23/10

Distribution of top-hat plan funds to participants was not permitted until determination of employer's solvency

An employer in Chapter 7 bankruptcy that had terminated an unfunded top-hat plan could not distribute the plan account balances to participants until a determination of the employer's solvency was made because the plan terms provided that the plan assets were subject to the claims of the employer's creditors in the event of insolvency, according to the U.S. Court of Appeals in San Francisco (CA-9) in Pham v. Decker.

In a suit by participants of a top-hat plan sponsored by an employer in bankruptcy under Chapter 7 of the Bankruptcy Code against the bankruptcy trustee for the employer, a district court granted summary judgment in favor of the participants. The district court, relying on a plan provision governing plan termination, concluded that because the employer had terminated the plan, the employer must distribute the plan funds to the participants, even if the employer was insolvent. The bankruptcy trustee appealed.

After explaining that it must first look at the plan language to determine the intent of the parties, the appellate court found that the plan at issue was intended to be a top-hat plan. Article 10.2 of the plan stated that the plan "was designed and intended to be a Top-Hat plan." The court noted that, if an employer funds a separate trust, the plan still remains unfunded if the employee's interest is unsecured or not otherwise protected from the employer's creditors. The court found that the plan at issue had many provisions stating that all contributions remained subject to the claims of the employer's creditors in the event of insolvency. Specifically, the court pointed to Article 10.6 of the plan, which stated that participants' vested account balances would be paid only to the extent that the employer was not insolvent at the time of payment.

The appellate court further explained that the district court's interpretation contravened the fundamental principle that the plan must be interpreted in accordance with the "clear intent of the parties" as established by the "explicit language" of the plan. The appellate court observed that the plan provision that the district court relied upon --Article 10.2 governing plan termination --expressly stated that the plan was intended to be an unfunded top-hat plan. By including this language in Article 10.2, the plan drafters explicitly provided that the termination provisions did not supersede the unfunded status of the plan, according to the court. Further, Article 10.6's prohibition of distributing plan assets when the employer was insolvent must be interpreted to apply even when the plan is terminated.

The appellate court found that its interpretation of the plan did not conflict with any other provision of the plan. Just because plan assets became "payable" upon plan termination did not mean the employer could actually pay the participants if the employer was insolvent at the time of payment. The court explained that the plan provided that the employer could not distribute plan assets to the participants under those circumstances.

The appellate court concluded that the employer's insolvency at the time of payment remained a question of fact for trial, and the district court erred in granting the participants' motion of summary judgment. The appellate court reversed the district court's order granting the participants summary judgment, and the case was remanded.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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