Bankruptcy Judge Shelley C. Chapman has issued an opinion that provides an important reminder for employees throughout the United States who participate in deferred-compensation plans, according to a commentary by Prof. Stephen J. Lubben in the New York Times DealBook blog. The opinion is from the long-running Lehman Brothers bankruptcy, but it applies to employees of all sorts of companies, according to Lubben. In short, the tax benefits you get from a deferred-compensation plan are not “free,” and by deferring compensation, you are taking on the credit risk of your employer. In this case, the employees — in agreeing to the subordination provision — had agreed to be paid after all other general unsecured creditors had been paid in full. Judge Chapman acknowledged that seemed a bit unfair — in her words “expected compensation for years of dedicated service disappeared in an instant in September 2008.” Nevertheless, this was the basic trade-off that employees had made decades ago: better tax treatment, in exchange for more risk.
