Financial Distress and Volatility - Advance Planning

Nonqualified Plan Benefits (SERPS and Deferred Compensation)

• These benefit plans and arrangements are designed to defer tax, by being subject to the claims of the employer's creditors.
• As a result, in a bankruptcy, the executive's benefits become an unsecured claim that could become valueless.
• PRECAUTIONS TO CONSIDER: 

1. __Review applicable performance goals, metrics, or formulae - and seek an update for any that seem ambiguous, uncertain, or unrealistic.
2. __ pursue avenues for collecting benefits before employer declines, subject to 409A constraints; 
3. __ diversify investments through changes to deferred compensation fund line-up and/or conversion of equity-based awards into other investments. See Too Much Employer Stock? Don't Ignore Diversification (Poerio, Law360, 2018).
4. __ Consider rabbi trust and other protection vehicles.  See Rabbi Trusts for what is called "change of heart protection" - but note that a rabbi trust assets must remain subject to claims of the employer's creditors (and consequently do not provide enhanced bankruptcy protection).

Retirement Benefits: 

• The assets of 401(k) plans and other tax-qualified retirement plans are generally exempt from the claims of an employer's creditors, and are therefore insulated from an employer's bankruptcy.
• PRECAUTIONS TO CONSIDER: (1) watch out for the untimely deposit of plan contributions and for the proper monitoring of plan investments; (2) study your investment diversification, especially if you have risks from employer stock; and (3) seek professional advice before selecting payout form from 401(k) and other pension plans.

Welfare Benefits - from Health to Life Insurance

• These plans generally involve unfunded, unvested benefits that generally result in unsecured claims that may disappear in an employer bankruptcy.
• Special provisions in the Bankruptcy Code provide mechanisms for the possible protection of retiree welfare benefits. 

Employment-related Agreements

• Seek changes relating to "money" issues such as  compensation and benefits and -- (1) severance, from notice of termination to different scenarios, such as  resignation for "good reason," (2) non-competition and other restrictive covenants, (3) director and officer liability insurance and indemnification rights, and (4) special change in control protections.

Personal Liability Risks 

• Income Tax Withholding: there are civil and criminal sanctions for those who do not pay required withholding and employment taxes. In times of employer distress, business owners and executives are sometimes tempted to divert funds, in the hope of paying these taxes when cash-flow permits. Beware of this disaster -and take action if you are aware of someone doing it (there is potential personal liability if a fiduciary knows of a violation and fails to take corrective action).
• Retirement Plans:   See "So You Think You Are Safe: Board Members and Personal Liability under ERISA"