(triggered by a change in control) in such rabbi trust arrangements do not render a plan "funded" for ERISA purposes. See Op. Dep't Labor 91-16 A, 1991 ERISA LEXIS 16, at *6.
In each of its Opinion Letters, the Department of Labor has focused not so much on the method by which the employer has arranged to pay its obligations under the plan but on the tax consequences of the arrangement. In each of the Opinion Letters, the Department notes that the position of the Internal Revenue Service regarding the tax consequences to the plan beneficiaries would be accorded significant weight in determining whether the plan was funded. That is, the plan is more likely than not to be regarded as unfunded if the beneficiaries under the plan do not incur tax liability during the year that the contributions to the plan are made. See, e.g., Central Fidelity Banks Op., 1992 ERISA LEXIS 44, at *6-*7; Op. Dep't Labor 92-13 A, 1992 ERISA LEXIS 14, at *7; Op. Dep't Labor 89-22 A, 1989 WL 224558 (ERISA), at *2-*3.
In arguing that the deferred compensation plan is funded, plaintiffs cite to another line of Department of Labor Opinion Letters that, according to the plaintiffs, establish that in order for a plan to be unfunded, six factors must all be present. Plaintiffs primarily rely on what they term the "Tandy Opinion," Op. Dep't Labor. 81-11 A, 1981 ERISA LEXIS 79 (Jan. 15, 1981) ("Tandy Op."), where the corporation (Tandy) established a death benefit plan for employees that would be paid from Tandy's general assets. To cover the liabilities, Tandy intended to purchase life insurance on the participants. According to Tandy, the insurance would be purchased by Tandy and would be payable to Tandy as the beneficiary. Furthermore, the policies would be subject to the claims of Tandy's general creditors and no plan participants would have any rights in the policies. The policies were not described in the plan as the source of the plan benefits or security for the benefits. Finally, the plan did not require or permit employee contributions. Based on these facts, the Department of Labor indicated that the insurance policies would not constitute assets of the plan.
Plaintiffs additionally cite to the "Donnelly Mirrors Inc." and "Industrial State Bank & Trust Co." Opinion Letters. See Op. Dep't Labor. 84-10 A, 1984 WL 23425 (ERISA) (Feb. 22, 1984) ("Donnelly Mirrors Op."); Op. Dept Labor 81-32 A, 1981 WL 17753 (ERISA) (Mar. 23, 1981) ("Industrial State Bank Op."). According to plaintiffs, these Opinion Letters hold that the use of a separately maintained fund, such as a checking account, to accumulate plan assets establishes that a plan is funded.
Plaintiffs' reliance on both sets of Opinion Letters is misplaced. First, in the Tandy Opinion Letter, the Department of Labor at no point stated that each of the elements listed was necessary for the insurance proceeds not to constitute plan assets. Instead, the Opinion Letter merely described the Department's understanding of the plan, based on the corporations' submission to the Department. Second, and more significant, none of the Opinion Letters cited by plaintiffs were addressed to whether a plan was unfunded for the purpose of determining whether it constituted a top hat or excess benefit plan. Instead, the opinion letters were addressed to the question of whether certain trusts, insurance policies, or employee elections to defer income constitute "plan assets" under Title I of ERISA. The Department of Labor has made clear that its analysis for determining whether certain assets are "plan assets" is irrelevant to the inquiry regarding the funded or unfunded status of a plan. See Op. Dep't Labor 94-31 A, 1994 WL 501646 n.3 (ERISA) (Sept. 9, 1994) ("the Department has determined that the analysis outlined above for identifying plan assets is not relevant to" top hat or excess benefit plans); Op. Dep't Labor 90-14 A, 1990 ERISA LEXIS 12 (May 8, 1990) (Regulation defining when certain monies that are withheld by employer to contribute to employee benefit plan become "plan assets" for purposes of Title I of ERISA is "not relevant" to top hat or excess benefit plans). Finally, at issue in the Donnelly Mirrors and Industrial State Bank Opinion Letters is whether an employee welfare benefit plan may qualify for an exemption from one of ERISA's reporting requirements, see 29 U.S.C. § 1023(3)(A), pursuant to 29 C.F.R. 2520.104-44. These Opinion Letters, therefore, are inapposite.
Although not addressing a plan directly analogous to that at issue in this action, the case law and the Department of Labor's advisory opinions provide the Court with two guiding principles. The first, stated expressly by the Department of Labor and followed in substance by the case law is the principle that "any determination of the 'unfunded' status of a 'top hat' or 'excess benefit' plan of deferred compensation requires an examination of the surrounding facts and circumstances, including the status of the plan under non-ERISA law." Central Fidelity Banks Op., 1992 ERISA LEXIS 44, at *6. Second, as set forth in the case law, which is consistent with the Department of Labor's position, see, e.g., Op. Dep't Labor 91-16 A, ante, "funding implies the existence of a res separate from the ordinary assets of the corporation." Dependahl, 653 F.2d 1208. From these guiding principles comes a single question that the Court must ask: can the beneficiary establish, through the plan documents, a legal right any greater than that of an unsecured creditor to a specific set of funds from which the employer is, under the terms of the plan, obligated to pay the deferred compensation? Because the Court answers this question in the negative, it must find the plan to be unfunded.
The deferred compensation plan expressly states that no asset of the corporation secures Cluett's obligations under the plan, and that the rights of plan beneficiaries are those of unsecured, general creditors of Cluett. Furthermore, the insurance agreement itself provides:
The benefits payable under this Agreement shall be independent of, and in addition to, any benefits payable under any other agreement . . . that may exist from time to time between the parties hereto, whether as salary, bonus or otherwise.
Nevertheless, to support their claims that the deferred compensation plan is funded by the insurance policies, plaintiffs cite to numerous documents and statements made by Cluett representatives, accountants, and other advisors to Cluett that were made prior to and subsequent to the 1984 restatement.
Plaintiffs also describe what they believed, noting that they looked to the insurance policy for the benefits and as security for payment of deferred compensation. These statements, however, are irrelevant to the terms of the 1984 plan. In New York, which governs the construction of both the deferred compensation plan and the insurance agreement,
the Court's inquiry into the intention of the parties to an unambiguous agreement must be limited to the words of the agreement. Stroll v. Epstein, 818 F. Supp. 640, 643 (S.D.N.Y.), aff'd 9 F.3d 1537 (2d Cir. 1992) (citing cases). Furthermore, as in Belsky, the Court holds that when the language of the plan expressly avoids making a direct tie between the insurance policy and the deferred compensation plan, it must enforce the terms of the plan regardless of the fact that the purpose of the insurance policy was to fund the plan. Thus, the fact that plaintiffs actually looked to the policies as security for deferred compensation cannot defeat the intention of the parties that is unambiguously expressed by the language of the two agreements. As in Belsky, the deferred compensation plan unambiguously states that the parties do not intend for any asset of the corporation to secure the rights of plan participants, that such assets would constitute general and unpledged assets of Cluett, and that the participants' rights under the plan "shall be solely those of unsecured creditors of Cluett." Finally, as in Belsky, the deferred compensation plan does not mandate that Cluett acquire any assets to finance its liabilities under the plan.
Plaintiffs attempt to minimize the language of the deferred compensation agreement by arguing that Cluett did not acquire or hold any separate insurance policies to fund its deferred compensation liabilities. Instead, plaintiffs correctly note that they were the owners of their respective life insurance policies. The issue, however, is not who technically owns the life insurance policies but whether plaintiffs have any rights greater than unsecured creditors to that portion of the life insurance policies that repays Cluett for its investment in the policy and finances the deferred compensation plan. Further, even if ownership of the policies were relevant, as the Court discussed above, plaintiffs' ownership of the policies does not entail all the incidents of ownership; in fact, certain important rights, such as the right to surrender the policy, were assigned to Cluett. Additionally, as the Court has already noted, the benefits under the insurance agreement are "independent of . . . any benefits payable under any other agreement." Thus, whatever rights the policy owner may have under the life insurance policy are irrelevant with respect to the deferred compensation plan. In undertaking an investment that will produce income sufficient to recover the costs of the retirement plan, Cluett did not "fund" the retirement plan for purposes of ERISA.
Finally, the Court also notes that its decision is consistent with the relevant Opinion Letters cited above. Although the parties did not indicate whether the Internal Revenue Service has issued any opinion on the tax consequences of the plan at issue or whether the plaintiffs did, during the course of their employment at Cluett, pay taxes on the value of the deferred compensation,
two basic principles stated by the Internal Revenue Service strongly suggest that plaintiffs were not subjected to current taxation. Under Section 451(a) of the Internal Revenue Code and Section 1.451-1(a) of the Income Tax Regulations, an item of gross income is includible in gross income for the taxable year in which actually or constructively received by a taxpayer using the cash receipts and disbursements method of accounting. 26 U.S.C. § 451(a); 26 C.F.R. § 1.451-1. Under the regulations, income is constructively received in the taxable year during which it is credited to the taxpayer's account, or set apart or otherwise made available to the taxpayer so that he or she may draw upon it at any time. No income is constructively received, however, if the taxpayer's control of its receipt is subject to substantial limitations or restrictions. 26 C.F.R. § 1.451-2. A "mere promise to pay, not represented by notes or secured in any way, does not constitute receipt of income within the meaning of the cash receipts and disbursements method of accounting." Priv. Ltr. Rul. 90-30-035 (July 27, 1990) (citing IRS Revenue Rulings). Furthermore, under the economic benefit doctrine, deferred compensation will be currently taxable "when assets are unconditionally and irrevocably paid into a fund or trust to be used for the employee's sole benefit." Id. (citing Sproull v. Commissioner, 16 T.C. 244 (1951), aff'd, 194 F.2d 541 (6th Cir. 1952) (per curiam); Rev. Rul. 60-31, 1960-1 C.B. 174). None of the above-mentioned principles suggests that plaintiffs presently incur taxes on the value of their deferred compensation. Indeed, the Internal Revenue Service has ruled, with respect to a company's deferred compensation plan in which a bookkeeping account was used in connection with the plan and where all payments under the plan were made from the general assets of the company, that no taxable event would occur until the beneficiaries under the plan were actually paid. As represented to the Service, the accounts did not create claims against specific assets of the company. Priv. Ltr. Rul. 90-30-035. In the instant case, the express terms of the deferred compensation plan state that no assets acquired by Cluett would secure Cluett's obligations under the deferred compensation plan and that any such assets would remain general, unpledged and unrestricted assets of Cluett. Hence, it appears that Cluett's deferred compensation policy does not create current tax liabilities to the plaintiffs.
For the reasons set forth above, the Court holds that Cluett's deferred compensation plan is unfunded. Plaintiffs' motion for summary judgment is denied. Defendants' motion for partial summary judgment is granted.
Dated: New York, New York
February 14, 1996
United States District Judge