Executive Compensation Plans Flashcards
Characteristics of Nonqualified Benefit Plans
(1) May be established by the employer or employee, (2) They may be discriminatory, (3) They are exempt from some ERISA requirement, (4) The employer may not claim a deduction for contributions until included in income, (5) Tax deferral only available on “at-risk’ fund, (6) Employer usually taxed on fund earnings, (7) Employee may not use five-year forward income averaging on lump sum distributions, all distributions subject to ordinary income tax.
Deferred Compensation Plan
(1) Also refers to Salary Continuation Plans; (2) A deferred compensation plan is a nonqualified plan based on an employer-employee agreement; (3) Typical plans include: disability, post & pre-retirement death benefits, and post-retirement payments
Pure Deferred Compensation/Salary Reduction Plan
(1) An agreement under which an employee gives up a portion of current compensation or forgoes increases or bonuses in exchange for the employer’s promise to pay a future benefit. (2) Also known as an “in lieu of” plan; (3) Delays taxation
Supplemental/ Salary Continuation Plan
(1) Additional fringe benefit - supplements other forms of compensation; (2) the employer promises to pay a future benefit but the employee forgoes nothing; (3) Recruiting tool or inducement to stay; (4) Types: Excess Benefit & SERP
Death-Benefit-Only Plan
(1) A type of ERISA welfare plan often misclassified as nonqualified; (2) No benefit during employee’s lifetime - death benefit only; (3) May be funded with insurance or deferred compensation; (4) Benefits are exempt from estate taxation but subject to income taxation
Excess Benefit Plan
(1) Provide benefits in excess of Section 415 contribution and benefit limits (less of 100% comp or $52k for defined contribution, 100% or $210k for defined benefit) (2) May be funded (partially ERISA exempt) or unfunded (fully ERISA exempt)
Supplemental Executive Retirement Plan (SERP)
(1) Provides benefits in excess of Section 415 limits, (2) Useful for mid-career recruits whose few years of service will result in modest, qualified retirement benefits, (3) Available only to Executives and Select Top Management, (4) Similar to Top Hat Plan, exempt from all but reporting, disclosure, enforcement, and administration requirements; (5) May be truly unfunded
Unfunded Plan
(1) Also Known as Informally Funded; (2) Usually designed for top executives (top-hat plan); (3) most common type of deferred comp; (4) Reserve set-up and owned by employer, subject to employer creditor claims; (5) Employee has no secured or beneficial interest in reserve; (6) Exempt from most ERISA nontax requirements; (7) Need not have substantial risk of forfeiture provision
Funded Plan
(1) The employee has a beneficial interest in property, but employee’s account available to company’s general creditors; (2) Afford Employee Maximum Security against Employer Default; (3) Must be subject to substantial risk of forfeiture and nontransferable to avoid unfavorable tax consequences.
Rabbi Trust
(1) Unfunded Plan that provides tax advantages of an unfunded plan and the security of a funded plan; (2) Trust assets are available to company’s general creditors; (3) Provides security in event of hostile takeover; (4) No offshore trusts; (5) No financial triggers
Secular Trust
(1) Funded Plan; (2)Assets Are not available to company’s general creditors; (3) Employee is taxed currently on deferred income that is contributed to the plan; (4) May be appropriate if the executive expects to be in higher tax bracket at retirement than in present
Nontax Requirements for Nonqualified Deferred Compensation Plans
(1) Reporting and Disclosure; (2) Participation and Vesting; (3) Funding; (4) Fiduciary Responsibility
Types of Nonqualified Plan fully ERISA exempt
(1) Governmental Plans; (2) Church Plans; (3) Unfunded Excess Benefit Plans
Nonqualified Plans that provide Benefits
(1) Retirement Benefit Plans or (2) Performance Incentive Plan
