Tough Day for Colonial Top Hats: They Lose on Deferred Compensation
Judge Williams ruled this week that funds set aside as deferred compensation for certain Colonial Bank employees constitutes property of the bankruptcy estate. The former employees, who were upper management and well-paid employees, may file claims along with other general unsecured creditors. Click here for the Memorandum Opinion.
The deferred compensation plan was what is known as a "top hat" plan. This is a non-qualified plan available only to certain key employees (hence, "top hat"), and is largely exempt from ERISA regulation. Its principle purpose is to defer compensation to a time when it may be taxed at a more favorable rate. Good luck with that!
The respondents did not take issue with the legal premise that the assets of top hat plans are not excluded from the bankruptcy estate. This seems well settled. Instead, they argued that the plan at issue did not meet the requirements for a "top hat" plan. They lost. For additional comment by former employees, you might want to read the article in the Montgomery Advertiser's June 29 issue.
The result is no doubt a hard pill to swallow for the unfortunate non-recipients of the deferred compensation. And at first blush, my concern was whether the employees had been adequately informed (remember, these are highly placed employees). But, from my reading of the findings set out in Judge Williams' opinion, it should have been obvious from plan materials that the funds were not set aside or otherwise protected, and remained assets of the company which were at risk. I suppose the caveat to take from this ruling is to read any plan materials carefully, and consult with your attorney, accountant or tax/investment professional to be sure you appreciate the risks and the potential advantages fully.
