Module 5 Flashcards
Qualified Plans (5)
- Favorable Tax Treatment
- Must be Funded
- Minimum Participation and Nondiscrimination Requirements
- Maximum Contribution and benefit limits
- Employer gets tax deduction in the year in which they put the money in the plan
Annual Addition Limits for Contributions to defined contribution plans (from employers) (Qualified Plans)
$57,000 or 100% of Pay (combination of employer contributions and employee contributions)
Maximum Accrued Benefit Limit (Qualified Plans)
Maximum retirement income from a pension plan is $230,000 per year
Annual Compensation Limit (Qualified Plans)
How much of an employees income can be considered for a retirement plan calculation. If the company is planning to match 3% of income, it’s off of this number, even if someone is making more than $285,000.
Nonqualified Plan (6)
- Any employer retirement, savings, or deferred compensation plan for employees that does not meet the IRC and ERISA requirements that apply to the qualified pensions and profit sharing plans
- Designed to recruit, reward and retain key executives and other select employees
- Employer deduction is available in the year of the employee taxation
- tax deferred only if unfunded or funds are at risk; no rollovers
- Earnings are currently taxable to employer
- Taxed at ordinary rates; averaging not available on lump sums
Non Qualified Plan Three Principles for Deferred Compensation
- The agreement to defer compensation must be made before the dollars are earned (in the years prior or within 30 days of being offered)
- The agreement must represent only an unsecured promise
- The plan must be unfunded or, if funded, benefits must be nontransferable and subject to a substantial risk of forfeiture (and available to creditors)
Substantial Risk of Forfeiture
- An employees right to payments must be contingent upon future performance of substantial services (death or disability are not considered substantial services)
- Plan must provide for loss of rights to payments if substantial services are not performed of if employment terminated for reasons other than death or disability
Unfunded Plan
- Mere promise made by the employer to pay benefits
- Avoids current tax
- Only subject to limited ERISA regulations (no disclosure or filing requirements under ERISA)
- Provides little security for employee
- “Top Hat” Plans - highly compensated employees
Informally Funded Plan
- A “general reserve” is built to fund future plan obligations but reserve is subject to the companies creditors
- Technically these are considered unfunded for purposes of ERISA because the assets are unsecured
Rabbi Trust
A trust set up with a independent financial institution for the purposes of the future payment of NQDO, as per the definition of a grantor trust, the trust earnings are currently taxable to the employer, rather than the employee.
- Two Beneficiaries - the employee and the creditors of the company
- Protected from future change of management of the company
Corporate Owned Life-Insurance (COLI)
- Provides money to pay benefit at death
- Accumulates cash value to pay benefit at retirement
- Company owns the life insurance policy and be the beneficiary of the policy
- tax-deferred and possibly tax-free, buildup of cash value
Funded Plans
- Assets are set aside (beyond reach of mngmt and creditor) to fund deferred comp
- Requires a substantial risk of forfeiture provision to avoid constructive receipt and current taxation benefits are taxed upon vesting
- Subject to some ERISA regulations
- Provides employees with greater confidence of future payments
- Secular Trust
Secular Trust
- Irrevocable fully funded trust established for an employee
- If an employee is vested in contributions, the results is current taxation to employee
- not subject to claims of creditors
Pure or Elective Nonqualified Plans
The Employee Chooses to defer compensations, to take less salary now and postpone it
- Salary Reduction Plan
Non-Elective (“Supplemental”) Non-qualified Plans
The employer funds the benefit and does not reduce the employee’s current compensation to fund future payments.
- Excess Benefit Plans
- SERP’s
Excess Benefit Plan
- Linked indirectly to the qualified plan in place and provides for benefits in excess of the amount the employee would otherwise be entitled under the qualified plan
- Payment will be made when the employee retires and paid out in the same way benefits are paid under a qualified retirement plan
- May be funded, informally funded, or unfunded.
Supplemental Executive Retirement Plan (SERP)
- “Top Hat” Plan
- unfunded plan providing benefits for select employees in excess of those provided by the employer’s qualified retirement plan (“Golden Handcuffs”)
- SERP’s can be used for broader range of purposes than excess benefit plans
- Golden Handcuffs - Unfunded SERP’s are exempt from all but the reporting and disclosure requirements of ERISA
Constructive Receipt Doctorine
- An amount is treated as received for tax purposes if credited to an employee account, set aside, or otherwise made available even if amount is not actually received.
Economic Benefit Doctorine
- Employees are taxed when plan accumulations are vested even though employees cannot yet withdraw cash.
NQDC Tax Implications (employer)
- Deduction when the money is taxed to the employee
- Earnings are taxed to the employer
NQDC Tax Implications (Employee)
- Taxed when benefit is constructively received
- Subject to FICA taxes when constructively received
Section 409A - AJCA 2004
- provides specific rules about allowing deferral of income, and prohibits arrangements that allow participants control of, or access to, deferred amounts.
- Prohibiting accelerating distributions
- Does not relate to qualified plans
Deferral Requirements from Section 409A
- Employees have 30 days after they first become eligible to participate in the plan to elect to make a deferral. thereafter, elections to defer compensation must occur in the year prior to the year in which the compensation was received
- Performance period, within the first 6 months of the 12 months performance period
Distribution Requirements Section 409A (8)
Can only be distributed due to:
- seperation from service (at least 6 months after for Key Employees)
- death
- disability
- Age, date or fixed schedule specified prior to first deferral
- change of control or ownership in company
- unforeseeable emergency
- plan termination
- Rabbi trusts cannot be offshore or contain financial triggers for benefit payment