4 - Executive Retirement Arrangements Flashcards
Excess benefit plans provide benefits that cannot be provided through qualified plans solely because of ________ limits on benefits and contributions.
If it is _______, an excess benefit plan is completely exempt from Title I of ERISA.
If it is ______, it is subject to Title I’s reporting and disclosure, fiduciary responsibility and enforcement provisions.
A supplemental plan providing benefits that a qualified plan cannot provide for reasons other than Section 415 limits—including the limit on compensation under Section 401(a)(17) and the dollar limit on elective deferrals—would not fall within the ______________ exemption.
Section 415
unfunded
funded
excess benefit plan
Top-hat plans are plans that are “________ and maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.”
Although they are ERISA Title I _______ plans, they are not subject to the participation, vesting, funding or fiduciary responsibility provisions of Title I. However, the enforcement and reporting and disclosure requirements do apply to these top-hat plans. Under the enforcement provisions, a top-hat plan must comply with ERISA’s ______ procedures and provide participants with access to ______ to pursue a claim for benefits.
The reporting and disclosure requirements that apply are simplified; the employer need only file a _______ with the Department of Labor (DOL) setting forth its name, address and taxpayer identification number; the number of top- hat plans it maintains; and the number of employees in each.
- unfunded
- pension
- claims review
- federal courts
- letter
Despite its failure to issue regulations or a definitive advisory opinion, DOL clearly has not adopted the ___ definition of highly compensated employees.
DOL expressed the view that the top-hat exemption would be available only for those employees who “by virtue of their position or compensation level, have the ability to affect their __________, taking into consideration any risks attendant thereto, and, [who] therefore, would not need the substantive rights and protection of _______.”
IRC
deferred compensation plan
Title I
Employers seek to have their nonqualified executive retirement arrangements fulfill one of the specified exemptions under ERISA since an exemption from Title I requirements gives the employer considerable flexibility in plan design in areas such as ______ requirements, ______and the ________ of otherwise vested benefits under certain conditions.
- participation
- vesting
- forfeiture
Why do employers seek to have their nonqualified executive retirement arrangements fulfill one of the specified exemptions under eRisA?
If a plan comes within the purview of Title I (for example, if it is funded or if it extends beyond a select group of executives), the following provisions of Title I apply (7):
- Reporting and disclosure
- Participation requirements
- Vesting
- Joint and survivor requirements
- Funding
- Fiduciary responsibility
- Accrual rules
The objectives most frequently set forth for implementing a supplemental executive retirement plan include the following:
- Restoring _____________: Most major employers have adopted excess benefit plans to replace retirement benefits that would have been payable under broad-based qualified plans were it not for the Section 415 limits. Many employers also have acted to restore qualified plan benefits lost by reason of other tax law provisions, such as the 401(a)(17) limit on pay that can be taken into account for qualified plan contributions and benefits, and the elective deferral limit for 401k plans. Plans structured to restore benefits lost because of these latter two limits must be structured as top-hat plans rather than as excess benefit plans.
- Providing more ____________: Often the objective of an executive benefit program is to provide a higher level of benefits than that generated by the company’s broad-based plans.
- Midcareer ___________: An executive changing jobs in mid- to late-career could suffer a significant loss in expected pension benefits because the pension from his or her former employer, although vested, will be frozen at the executive’s pay level at the time of change.
- Recognizing ________: Many broad-based plans provide benefits related to base pay only.
- Executive _________: One solution if an organization’s benefit programs are not uniform from one operation or location to another is to provide a supplemental umbrella plan that makes up any difference between the specified umbrella level of benefits and the benefits actually provided at the locations where the executive has been employed.
- base plan benefits
- benefits
- recruiting
- incentive pay
- transfers
Other objectives: There may be many other reasons for executive benefit programs including (5):
- Recognizing ___________: Because it cannot be considered as pay for determining qualified plan benefits or contributions, employers often establish supplemental arrangements to provide benefits related to deferred amounts.
- ________ treatment: Unfunded executive retirement plans need not comply with the vesting rules that apply to broad-based plans. A supplemental plan with rigorous vesting standards can help retain key executives since a terminating executive will forfeit accrued benefits unless termination occurs under circumstances where the employer is willing to provide these benefits.
- ________ provisions: Broad-based plan benefits cannot be forfeited once they are vested; such is not the case for unfunded supplemental executive benefits, which can be forfeited even after they are in payment status. Making benefits subject to forfeiture if an executive goes to work for a competitor after retirement could be a way of providing some protection in this event.
- _________: It may be desirable to encourage certain executives to retire before their normal retirement ages. If benefits under broad-based plans are insufficient to meet retirement income needs, supplemental benefits can be used to provide early retirement incentives.
- _________: Organizations often enter into different deferred compensation and supplemental benefit arrangements with individual executives as a result of negotiated employment agreements or corporate acquisitions. Supplemental executive benefit plans can standardize these arrangements and establish a uniform policy avoiding the need for special contracts and disclosure.
- deferred compensation
- Golden handcuffs
- Noncompete
- Golden handshakes
- Uniform
The general design issues that an employer should consider in structuring executive benefit programs (3):
- Internal _________: Many plans provide the same, or nearly the same, level of benefits for all executives while imposing relatively short-service requirements. Concern over this issue often prompts employers to provide additional service-related benefits for ______ executives.
- _______ and _______ considerations: Supplemental executive benefits generally fall within the scope of Financial Accounting Standard ___ as refined by Financial Accounting Standards 132 and 158. Special consideration should be given to ___________ assumptions for an executive group since items such as future salary growth, turnover and retirement ages might vary compared to patterns for rank-and-file employees.
- ___________ considerations: In an unfunded retirement plan, the employer generally is entitled to a deduction only when benefits are _____ or become taxable to the executive. Retirement benefits for executives will be treated as _______ without special treatment for lump sums. However, these benefits will not be subject to penalty taxes for early withdrawals or failure to meet minimum distribution requirements, as will be qualified plan payments. The issues of avoiding the tax doctrines of economic benefit or of constructive receipt are also important.
-
equity
- long-service
-
Cost & accounting
- 87
- actuarial
-
Tax
- paid
- ordinary income
The __________ states that if a taxpayer is receiving a current benefit, he or she should be taxed currently on the value of that benefit.
The ___________ states that if a taxpayer could receive income at any time but elects to receive it later, he or she is still taxed currently because of having the nonforfeitable right to the income.
Revenue Ruling 60-31 states that deferred compensation is not taxed before actual receipt whether it is forfeitable or nonforfeitable, provided:
- The deferral is agreed to before ________.
- The deferral amount is not unconditionally placed in _____ or in ______ for the benefit of the employee.
- The promise to pay the deferred compensation is merely a ________ obligation not evidenced by notes or secured in any other manner.
doctrine of economic benefit
doctrine of constructive receipt
- the compensation is earned
- trust / escrow
- contractual
The reason differences between defined benefit and defined contribution plans are less significant in executive benefit plans than with broad-based plans and
- differences between these two approaches are ______ in the executive arena
- defined benefit executive plans are not subject to ______ provisions of ERISA
- A defined contribution executive benefit plan can be structured to avoid one of the key characteristics of a broad-based plan—the transfer of ______ and ______ risks to employees.
less significant
plan termination
investment / inflation
Most executive benefit plans have been established on a __________ basis, particularly in cases where the plan builds on an underlying broad-based defined benefit plan.
This approach works well when the plan is unfunded because it can accommodate most employer objectives and serves to _______ benefits from all sources. It also is easy to ______ and ______.
defined benefit
coordinate
explain / administer
The defined contribution approach can be an attractive design for an executive benefit plan for several reasons, whether or not the plan is funded. These reasons include the following:
- Executives, accustomed to dealing with _______ plans, might feel more comfortable with this approach than with a conventional income-replacement approach.
- The defined contribution approach more readily coordinates with the use of ________ and its role in overall executive compensation.
- Any __________ when benefits are unfunded can be tied to company performance measurements such as growth in profits, company stock prices, dividend growth or return on assets.
- Several ________ issues are easier to deal with, such as offsets for vested benefits from prior employment, making additional contributions sufficient to attract executives in midcareer, and so forth.
- capital accumulation
- company stock
- imputed rates of return
- design
An executive benefit plan will have many provisions that are significantly different from the corresponding provisions in the employer’s broad-based plan. These distinctive provisions usually include: (3)
- Definitions of ________
- _______ rates
- _________ provisions.
- pay and service
- Benefit accrual
- Early retirement
There is little need for differences in certain design elements between executive plans and broad-based plans and, in fact, consistency can be highly desirable. Some areas where consistency usually occurs include the following:
- Form and manner in which benefits are ________ (i.e., joint and survivor payment options)
- Other optional forms of ______
- Right to make and change ________
- Facility of ________ (if the payee is mentally or physically incapable of accepting payment)
- Procedures if a beneficiary cannot be _______
- State law that will govern plan _______
- Right to ______ or ______ the plan.
It may also be prudent to coordinate executive and base plan administration and communication, although _______ considerations may dictate that the plans be handled separately.
- distributed
- payment
- beneficiary designations
- payment authority
- located
- interpretation
- amend / terminate
- confidentiality
(Executive Retirement Plans)
- Eligibility for participation normally is limited to members of top management who make significant contributions to the organization’s ______.
- Eligibility should be restricted to those executives for whom the plan is really _______.
- Eligibility requirements that are too broad or that are established so that they automatically expand the group covered, such as with a __________ that could be eroded by inflationary pressure, can lead to substantial cost increases for an employer.
success
intended
minimum salary requirement
