Deferred Comp and Stock Plans Flashcards
Constructive Receipt Doctrine
The constructive receipt doctrine states that any income constructively, though not actually, received is currently includible in taxable income. In other words, money will be considered taxable income to an executive who has unrestricted access to it, whether they receive it or not, as long as there is no substantial risk of forfeiture.
Substantial Risk of Forfeiture
Compensation is subject to a substantial risk of forfeiture if the right to it is conditioned on
- future performance of substantial services by an executive, or
- the occurrence of a condition related to organizational goals (e.g., attainment of a prescribed level of earnings or equity value or completion of an initial public offering).
In order for tax deferral to occur, the possibility of forfeiture must be substantial (i.e., there must be a significant chance the deferred compensation will be forfeited).
Economic Benefit Doctrine
Taxpayers have income when they receive the economic benefit of the proceeds. This occurs when the employer irrevocably places funds for the benefit of the employee beyond the reach of the employer’s creditors. Income is thus received even if the employee does not have actual or even constructive receipt.
Three “Rs” of Nonqualified Plans - Reasons to Have
1) recruit
2) retain
3) reward selected executives or other key employees
Factors to consider for Deferred Comp Plans
following are several factors to consider: Executive’s current marginal ordinary income tax and capital gain tax rates Marginal ordinary income and capital gain tax rates anticipated at the time of distribution
Executive’s investment expertise and available investment alternatives Employer’s financial condition (risk of bankruptcy or insolvency) Whether there is an employer matching contribution and available investment options for deferrals
Employer’s fixed crediting rate on deferrals
