102-9 Nonqualified Deferred Compensation

Question 1

Nonqualified deferred compensation plans (DQDC)

Answer 1

Arrangements that do not meet the requirements of IRC Section 401(a) or qualified retirement plans

Used to benefit key execs

Does not have to comply w/ the general nondiscrimination rules that apply to qualified plans

Less administrative cost than qualified plan

Question 2

Nonqualified plan may be structured in two ways

Answer 2

1) salary reduction or pure deferred compensation arrangement
- the plan uses some portion of the exec’s current compensation to fund the promised compensation benefit

2) salary continuation approach
- plan is funded w/ money that the employer has set aside from its current earnings to benefit the exec

Question 3

3 basic income tax doctrines

Answer 3

1) constructive receipt
- occurs if exec has unrestricted access to the funds

2) economic benefit doctrine
- defines what constitutes income - whether the plan grants to the exec greater rights to the employer’s property than those of other parties

3) substantial risk of forfeiture

Question 4

Unfunded NQDC plan

Answer 4

The benefits typically do not vest until the employee retires

2 types:
A) pure unfunded plan
-only a mere promise is made by the employer to pay the benefit to the exec

B) Informally funded plan

• assets owned by employer, subject to debtors’ claims
• provides some security absent the employer’s bankruptcy or acquisition

Question 5

Corporate owned life insurance

Answer 5

Provide funds to pay the benefit in the event of the exec’s death before retirement while also accumulating cash value to pay the benefit at retirement (or some other date) if the exec is still alive

Question 6

Rabbi Trust

Answer 6

An arrangement under which the employer places assets into an irrevocable trust to fund the payment of promised deferred compensation to selected employees

The trust agreement states that the assets placed in the trust remain subject to the claims of the employer’s general creditors in the event of its insolvency or bankruptcy

The employer must pay tax each year on the trust earnings

Question 7

Surety Bond

Answer 7

An exec may consider purchasing if there is concern w/ regards to receiving the payment of the deferred compensation from the former employer

Ensures that the benefit will be paid if, for any reason, the employer is unable to make good on its promise

Question 8

Secular Trust

Answer 8

An irrevocable trust established for the exclusive benefit of the employee/exec

The exec who benefits from such a trust does not have a substantial risk of forfeiture and is taxed immediately on the employer contribution annually on the trust earnings

Employer receives immediate income tax deduction for amounts contributed to the trust

Question 9

Excess benefit plan

Answer 9

Nonqualified plan that focuses on providing retirement income to execs

The plan provides the exec w/ a benefit over and above the IRC Section 415 defined benefit plan limit ($225,000 for 2019)

It is a purely unfunded plan

Not subject to ERISA reporting, disclosure rules

Plan can discriminate in favor of highly compensated individuals

Question 10

Supplemental executive retirement plan (SERP)

Answer 10

The prototypical nonqualified salary continuation plan

Designed to provide a specified % of retirement income to the exec without regard to the Section 415 benefit limit