Assignment 4 - Executive Retirement Arrangements Flashcards
1
Q
Tax Issues
A
- unfunded
- ER receives no tax ded. until benef. paid
- EE pays no tax until benef. rec’d
- Doctrine of econ. benef.
- Doctrine of constructive receipt
- SS tax = is due when ti is received or recognized as compensation at an ealier time.
2
Q
- if a taxpayer is receiving a current benef, they s/b taxed on the value of that benef.
- ER can’t get tax deduction until the EE gets taxed on the benefts (unlike ERISA)
- whether the indiv. receives any sort of benefit that has an economic value currently from this plan.
- EXP = if company is providing life ins. that I get to direct who is the benef., then there is an econ. benef. even if I can’t take any dollars from the policy.
A
Doctrine of Economic Benefit
3
Q
states that even if an indiv. has not rec’d actual cash, it may be deemed as rec’d and taxable
- ER can’t get tax deduction until the EE gets taxed on the benefits.
- I really have control over the funds
- so if I can decide today not to take the money and then tomorrow change my mind and get the funds, I have constructive receipt.
A
Doctrine of Constructive Receipt
4
Q
Plan Features
A
- Eligibility = need to be narrow (just select group is eligible); position
- Compensation Cov’d = bonus; l/t incentives
- Service
- Retirement Age
5
Q
Benefit Security = unfunded plans
A
- earmarked assets not held in trust
- substantial risk of forfeiture or loss of funds
6
Q
Benefit Security = Rabbi Trusts
A
irrevocable trust for an exec. plan that restricts the availability of the assets to current management but retains the ability of creditors to reach these assets
- only for use for deferred comp arrangements
- subject to creditors
7
Q
Benefit Security = secular trust
A
- only for use for deferred comp arrangements
- not subject to creditors
- EEs have “constructive receipt”
8
Q
Unfunded Benefit Structure
A
- phantom stock
- “mirror” 401K investments
- tied to an index
- actual investments - comp. pays on-going tax
- paper accounts - no real money invested; comp. obligated to find $ to pay when due
9
Q
- ER owns life insurance on EE
- ER is benef. on life ins. on EE
- Life ins. is corporate assets
- assets grow inside life insurance contract, tax-favored
- at retirement, company uses internal cash from the policy value to provide benefits
- “split-dollar plan”
A
Company Owned Life Insurance (COLI)
10
Q
- Exec. chooses to defer some compensation
- reduces current taxes
- spreads bonus over years
- adds to retirement income
- Rules to avoid current taxes:
- be irrevocable
- agree before copmensation is earned
- specified period of time
A
Deferred Compensation - Supplemental Exec. Retirement Plans (SERP)
11
Q
- doesn’t apply to 401K’s or S/T deferrals such as bonuses
- applies to ALL exec. deferrals
A
409a = application
12
Q
- mandates the terms/conditions that can be in nonqualifed deferred comp plans
Governs nonqualified deferred comp plans
- When exec. defer comp to a later date, can’t just wait to decide when they will take the comp - there has to be a clearly stated date.
A
409A = concept
13
Q
- must be substantial risk of forfeiture
- terms of pmt must be stated in plan doc.
- pmt can only be chg’d due to death, disability, chg of control of corp., sep of service; unforeseeable emerg.
A
409a = Requirements
14
Q
409a = Penalties
A
- exec. suffers the penalty
- full amount of def’d comp is taxable
- 20% penalty
- no penalty to company
15
Q
- unfunded plans
- provide deferred comp to a select group of management
- ERISA TItle 1 plans = not subj. to partic., vesting, funding or fiduc. resp.
- subj to enforcement and rptg/discl. requirements
A
Top Hat Plans
