CH 15 - Non-Qualified Deferred-Compensation Plans

Question 1

What is the employer’s objective when implementing a non-qualified deferred compensation plan? (3)

Answer 1

• attract, retain, and cover only executives
• provide additional/supplemental layer of benefits to executives
• simplify administration

Question 2

Section 409A, allows executives to choose when distributions/withdrawals will be made. However, there can be earlier distributions/withdrawals only upon the FOUR stated events?

Answer 2

• unforeseen emergency
• change in ownership or control
• disability/death
• separation from service (aka - termination)

Question 3

Executives are allowed to change distribution options by deferral only (NOT accelerated), ______ months before time of distribution.

Answer 3

12

Question 4

When must a 409A election be made?

Answer 4

Before the year in which the income is earned.

Question 5

Failure to satisfy 409A results in current income tax and ____% penalty to the executive.

Answer 5

20%

Question 6

What is a Supplemental Executive Retirement Plans (SERPs)?

Answer 6

An benefit that allow employers to give additional benefits (over qualified plans) that is often on a deferred vesting schedule.

Question 7

What are the TWO types of executive deferral compensation plans?

Answer 7

SERP

and

Salary Reduction

Question 8

This is similar to 401(k) salary deferral, where it allows selected executives to defer current income until retirement.

Answer 8

Salary Reduction

Question 9

How is a non-qualified deferred-compensation plan designed from an executive’s and employer’s perspective?

A. executive (4)

B. employer (3)

Answer 9

executive =

• arbitrations are binding
• rabbi trust (control change)
• wants immediate vesting
• access but 409A will not allow it

employer =

• deferred vesting (golden handcuffs)
• do not compete clause
• post-retirement consulting provision

Question 10

Which of the following does not solve insolvency risk?

A. irrevocable “secular trust”

B. rabbi trust

C. surety bond

Answer 10

irrevocable “secular trust” and rabbi trust

Question 11

This type of irrevocable trust has assets that are still assessable to creditors.

Answer 11

rabbi trust

Question 12

What is the purpose of a rabbi trust?

Answer 12

A way to fund executive benefits in case of a change in control. Basically a system that notifies the trustee of any pending financial problems that could trigger suspension of benefits.

Question 13

What is the difference between the taxation of a rabbi trust and a secular trust?

Answer 13

Secular trust causes current taxation because the plan is considered “funded”, thus causing ERISA problems.

Question 14

This guarantee’s payment to the executive and is purchased by the executive only.

Answer 14

surety bond

Question 15

When life insurance is used to fund benefits, who owns the life insurance policy?

Answer 15

employer

Question 16

What are the TWO tax-advantages of funding executive plans with life insurance?

Answer 16

• tax-free build up
• tax-free death benefit

Question 17

What type of flexibility would you get by funding an executive plan with life insurance?

Answer 17

The policy could use the cash value to fund retirement or retain policies due to death of participant.

Question 18

Who owns the Executive Bonus Life Insurance?

A. employer

B. employee

Answer 18

Employee is the policy owner, insured and chooses the beneficiary. The employer simply pays a bonus equal to the premium.

Question 19

What are the tax consequences for an employee and the employer of an executive-bonus life insurance transaction?

Answer 19

employee = taxable income

employer = deduction

Question 20

What is the formula for handling a double executive-bonus life insurance payment?

Answer 20

premium

( 1 – tax rate )

Question 21

Even if there’s a current economic benefit, taxes can be deferred if…

Answer 21

there is a substantial risk of forfeiture.

Question 22

Explain the economic benefit doctrine.

Answer 22

When property is set aside irrevocably, and no longer owned by the employer on the executive’s behalf. The property cannot be available to creditors to still be considered an economic benefit.

Question 23

How can taxes still be deferred if there is no substantial risk of forfeiture? (2)

Answer 23

No current economic benefit (Sec. 83)

and

No constructive receipt (Sec. 409A)