The long-running Lehman Brothers bankruptcy case brings to light the risk employees have when participating in an employer sponsored nonqualified deferred compensation plan. In this case (from the U.S. Bankruptcy Court in Manhattan), more than 300 executives and certain employees participated in a nonqualified deferred compensation plan (the “Plan”). The Plan provided that payments under the Plan are “unsecured subordinate obligations” of Lehman Brothers (the “Company”) and contained a provision that the Plan benefit payments would be subordinated to other claims/creditors of the Company. Employees entered into agreements over a 20+ year period whereby they could defer a portion of their compensation into the Plan in return for the Company’s promise to pay benefits at some point in the future (i.e. retirement).
The employees filed claims for benefits under the Plan and the bankruptcy court determined that the language in the Plan was clear – these employees were treated as unsecured creditors and ultimately received nothing. While this is not unusual (nonqualified deferred compensation plans are generally subject to the creditors of the company that sponsors the plan), it does hit home the fact that employees ultimately take a credit risk on their employer as participants in a nonqualified deferred compensation plan that the employer will be able to pay the benefits when due.