Nonqualified Deferred Compensation Flashcards
Nonqualified Deferred Compensation
An employer retirement, savings, or deferred compensation plan for employees that does NOT meet the IRS tax and ERISA labor law requirements that apply to a qualified pension and profit sharing plans
Does it discriminate?
Yes–provides additional deferred compensation to a select group of executives
When is it used? (3)
- employer wants to provide deferred comp to executives but cant afford a qualified plan
- employer wants to recruit, retain, rewear, and retire executive talent
- closely-held corp wants to attract and retain non-shareholder employees
What are the plans objectices? (6)
- Hire and retain key employees
- Provide performance incentives
- control the timing of and access to plan funds
- tax deferral for key employees
- benefit certainty if this is funded by COLI, Rabbi trust or Secular Trust
- make the funds available during employment to the extent allowed by the law
6 advantages
- flexible plan design
- minimal irs, erisa requirements
- tax deferral
- use to bind employees
- provide confidence to employees
- assets available at all times
2 Employer disadvantages
- tax deduction deferred until income is taxable to employee
- some employers lack the structure necessary to successfuly use
5 employee disadvantages
- unsecured promised payment
- reduced confidentiality
- must try to avoid constructive receipt or benefits will be taxed before receieved
- must avoid penalties for accelerated payments
- NOT guaranteed by PBGC
5 types of plans
- Salary continuation plan
- Supplemental executive retirement plan
- salary reduction plan
- excess benefit plan
- shadow stock arrangements
Salary Continuation plan
provides a specified deferred amount payable in the future such as retirement, disability, or death of the employee
Supplemental Executive Retirement Plan
a certain type of salary continuation plan ofr a “select group” of management or HCEs
What plan is also known as the Top Hat Plan?
SERP
Salary Reduction Plan
involves an elective deferall of a specified compensation amount that the employee would have otherwise received
Excess Benefit Plan
provides benefits only for executives whose annual projected qualified plan benefits are limited under the dollar amount of IRC
3 ways benefits can take form of
- a lump sum payment
- series of annual payments at retirement
- life or joint and survivor annuties
Doctorine of Constructive Receipt
Employees pay ordinary income tax on benefits from unfunded nonqualified deferred compensation plans in the first year in which the benefit is actually or contructively received
