Nonqualified Deferred Compensation Plans
Introduction
So far, you have primarily received the message that employer-sponsored plans cannot disadvantage the rank-and-file employees. There have been a few notable exceptions with plans that are either integrated with social security, cross-tested, or age-weighted. Another significant exception is the opportunity for executives to defer some of their otherwise current compensation into a nonqualified deferred compensation plan.
The goal of these plans is to shift income from the current period down the participant’s timeline and perhaps, all the way until retirement. There are certain actions that could be taken that would completely destroy this goal and render all benefits taxable in the current period. This is very important to understand if either you or a potential client has access to a nonqualified deferred compensation plan.
Employers also have a few life insurance-based options for either minimizing their own risks or for creating additional value for their top-ranking executives. All of these concepts need to be explored and understood thoroughly.
Learning Goals
Compare nonqualified plans with qualified plans.
Understand the tax treatment of nonqualified plans.
Identify the key nonqualified plan design considerations.
Describe how a plan can be designed to somewhat protect the interests of the participants.
Identify the different types of §457 plans.
Understand the possible application of an executive bonus-life insurance plan.
Nonqualified Versus Qualified Plans
By now, you are already familiar with the tax structure of a qualified plan. The business receives a tax deduction at the time that the contribution is made, and the participant does not pay any tax until they eventually withdraw the funds from the retirement account. For the participant, this is known as tax deferral.
At its very simplest level, a nonqualified compensation is a viable compensation that a worker has earned in one year, but does not receive until another. Nonqualified plans follow the accounting matching rule. The employer receives a deduction for wages when an employee receives the taxable income. If the wages are deferred, then the employer does not get the deduction and the employee does not have “taxable income” until certain tests have been met. In this chapter, you will learn all about this process.
Consider Company “A” and Employee “B”. Employee B earns a certain wage from Company A, but not all of it is received in the current year (2016). For now, let’s assume that Employee A defers the money for three years (2019). While the money is deferred, it is sitting somewhere. It is most likely in a bank account or some other very liquid asset. It is earning some rate of interest during the deferral period. Are the earnings tax-deferred? Or, does someone have a tax consequence in each year, where the deferred assets have earnings? The answer is that Company A will pay taxes on the earnings during the deferral period. When the deferred wages plus earnings are paid to Employee B in 2019, the company will receive a tax deduction for the full amount paid to the employee, and the employee will recognize all compensation as taxable income in the year in which it is received (2019).
In terms of design features, nonqualified plans are more flexible than qualified plans. They can structure almost any combination that they want and often outside the purview of Employee Retirement Income Security Act (ERISA). Because of the reduced regulatory oversight and the requisite compliance testing, nonqualified plans are also less costly to administer. Nonqualified plans can be used to legitimately favor the highly compensated employees (HCEs). As such, they are a great recruitment tool!
Consider another company called Johnson Fabricators. They are a very small company with only 10 employees in total. Two of the employees are also the owners, and they each earn $100,000 per year. The other eight employees earn a total of $240,000 (an average salary of $30,000) per year. If Johnson Fabricators decided to implement a profit-sharing plan with the maximum 25 percent contribution, then the cost to the employer would be $110,000 (25% × [$100,000 + $100,000 + $240,000]). However, if the company decided to instead offer a 25 percent nonqualified deferred compensation plan to only the two owners, which is completely legal, their total cost would be $50,000 (25% × [$100,000 + $100,000]). The company will also have an incremental loss from not having a current tax deduction and the opportunity cost of any investment gains on the money that would have been saved as a result of tax deduction. They would still receive a corporate tax deduction when the funds were ultimately taxed to the employee and owners. Even if we estimate the combined tax and opportunity cost expense to be $25,000 then the total “cost” of offering the nonqualified plan is still only $75,000 compared to $110,000 with the other alternative. This example ignores the administrative costs, but they will be lower in a nonqualified plan and this will further amplify the cost savings.
The nonqualified plan is certainly the lower cost option, but it will still cost more than $1 to provide $1’s worth of benefit. The loss of a tax deduction and any administrative costs will still push the total cost above $1 per dollar of benefits received. See Table 15.1 for a summarization of the differences between nonqualified and qualified plans.
Table 15.1 Differences between nonqualified and qualified plans
Nonqualified plans |
Qualified plans |
Discrimination in favor of the HCEs is acceptable |
Discrimination is not permitted |
Exempt from most of ERISA |
ERISA still applies |
No employer tax deduction until the employee has taxable income |
Immediate employer deduction for the contributions made |
Investment earnings are taxable to the employer |
Investment earnings accrue tax-deferred until they are eventually taxed to the participant |
Distributions are ultimately taxed at ordinary rates to the participant |
Distributions are ultimately taxed at ordinary rates to the participant |
More design flexibility |
Less design flexibility |
Economic Benefit Rule
From a tax perspective, the employer will only receive a tax deduction when the income is taxable to the employee. Income is not considered taxable as long as there remains a substantial risk of forfeiture, which means that the employee might lose the money under certain circumstances. To maintain a substantial risk of forfeiture, the employer could use longer vesting schedules, performance thresholds, or provisions that the money will revert to the employer if the employee does not consult with the employer during retirement or chooses to work for a competitor of the employer.
If there is not a lingering substantial risk of forfeiture, then the compensation will automatically be taxed ... unless the deferred compensation plan does not violate two rules. If these rules are not violated, then the deferred compensation will remain deferred and untaxed. The first rule is called the economic benefit rule, which you will learn about in this section, and the second is called the constructive receipt rule, which you will learn about in the next section.
The economic benefit rule (§83) states that any economic benefit must be included in the taxable income if it has a value that is both ascertainable and current. If the exact dollar amount is known and there is no risk of forfeiture, then it is currently taxed to the employee and the employer receives a deduction. The idea is that if the employee has no risk of forfeiture and the company transfers the dollar amount to a trust where distributions can only be paid to the participant, then there is an ascertainable economic benefit and the compensation should be taxed to the employee.
If the benefit is taxed in the current year, then the whole purpose of deferring the compensation is negated. The purpose to defer income is to shift it from being taxed in a time period when there is substantial income (higher tax bracket in a progressive tax structure) to a period when there is less income (theoretically, a lower tax bracket).
To not violate the economic benefit rule, the assets in a nonqualified plan must remain assets of the employer until they are actually paid to the employee. You will see later in this chapter what issue this may create.
Constructive Receipt Rule
Another rule that may impact the tax deferral of nonqualified deferred compensation plans is known as the constructive receipt rule (§409A). The essence of the constructive receipt rule is whether the participants have the ability to choose to receive compensation now or later. If they have the ad hoc authority to choose the timing of their compensation on a month-by-month basis, then they will violate this rule and the compensation will be taxable in the current period.
One common example of this scenario is a school teacher. Technically, we only “work” during the physical school year, although we do work on enhancing courses and research during the summer months. Most teachers receive a paycheck every month. The Internal Revenue Service (IRS) would say that we are deferring a portion of our salary, which is then spread evenly over the months, so that we receive paychecks during the months when we are not actually teaching a class. Another example could be an executive who receives a bonus, but decides when to receive that bonus based on his tax-planning strategies. The doctrine of constructive receipt does not require physical possession of the funds in order to deem them as having been received and therefore, taxable in the current period.
The IRS does not want people choosing when they receive a portion of their compensation on an event-by-event basis. If someone is found “managing” when they receive the compensation, then not only will they have current taxable income, but also a 20 percent penalty.
It is perfectly legal for an employee to decide to receive a portion of their compensation at a later time ... they just cannot defer a bonus at the point in time when they find out that they will receive a bonus. They must make the election to defer a portion of their income for a given calendar year before the end of the previous calendar year.
The constructive receipt rule does not apply if the compensation is received within the first 2½ months following the year in which the participant becomes vested in the compensation.
If the deferred compensation does not violate either the economic benefit rule or the constructive receipt rule, then the compensation is tax-deferred until it is distributed. The employer will not receive a tax deduction until the participant has taxable income, and the employer will pay taxes on any investment gains earned by the deferred compensation while it is waiting to be distributed.
Distribution from a nonqualified deferred compensation plan could occur at a specific date, at the point of separation of service, at death or disability, at a change in the corporate ownership, or at the point of an unforeseen emergency.
What About Wage-Based Taxes?
If you look on your paycheck stub, you will notice a subtraction from your gross pay for FICA. This stands for Federal Insurance Contributions Act (FICA), which is a glorified term for social security taxes. The taxes are based on the earned income. What happens when some of that income is deferred using a nonqualified deferred compensation program? The income is applied to FICA taxes, not when it is distributed, but at the later of (1) the date services were performed to earn the money or (2) when there is no longer any substantial risk of forfeiture.
Consider Participant “A” who defers 10 percent of their wages every year into a nonqualified deferred compensation plan. This particular plan is set up such that all funds in the plan are fully vested after Participant A has completed five years of service. After five years have passed, the entire account balance is included in the taxable income for the purpose of calculating FICA (social security) taxes because a substantial risk of forfeiture has been removed. For FICA taxes, it does not matter if the participant has been careful to not violate the economic benefit rule and the constructive receipt rule. Social security taxes are a whole different animal.
For any given year, an income earned above a certain threshold does not apply to social security taxes anyway. That income threshold is $118,500 (2016 limit). To the extent that the normal income plus the deferred compensation exceeds this number, it will not be taxed for FICA whether the income is from the normal wages or the deferred compensation.
There is also a concept known as the nonduplication rule that applies to the FICA tax. Income may be taxed for FICA purposes that are still tax-deferred for regular income taxes because the participant has not violated either the economic benefit rule or the constructive receipt rule. In such a case, the deferred compensation will eventually be recognized as a taxable income. When this happens, the deferred compensation is not taxed, for social security purposes, a second time.
Objectives of Nonqualified Deferred Compensation
The obvious objective of a nonqualified deferred compensation plan is to attract and retain key executive talent. If an employer wants the best people, then they must be willing to pay for it. In essence, the nonqualified plan is a supplemental layer of benefits. Think of it as the top tier on a twotiered cake. An employer’s qualified plan provides a nice base on which to build. The nonqualified plan is the upper layer where most of the decorations are displayed.
How could a nonqualified deferred compensation plan uniquely benefit startup companies? Startups are not known for being cash rich. In fact, they are usually levered (in debt) as much as possible. They can use nonqualified deferred compensation plans to attract key people necessary for success and then pay them once their business has taken off and has plenty of cash. There is more risk on the table for the participants in this case because the startup might not take off. It might actually flop big time and the participants would lose all the deferred compensation. To adjust for this increased level of risk, startups will often offer very generous nonqualified plans.
The employer might use nonqualified deferred compensation as a dangling carrot to incentivize the participants to reach certain performance targets. In this case, economic benefit may be more linked to performance than attainment of certain tenure of employment.
There are also three golden incentives involved with the nonqualified deferred compensation plans. The first “golden” is the golden handshake, which is an incentive to retire. This might be a deferred compensation program that will pay the participant a certain sum only after retiring from the employer. This incentive will soften the impact of retirement for the employee. The second “golden” is the golden handcuffs, which is an incentive to stay. This might take the form of a very long vesting schedule or a consulting stipulation, where benefits are only payable to the participant if they consult for the employer for a specific time period after formal retirement. The third “golden” is the golden parachute, which is an incentive to permit a takeover. In this scenario, an executive will receive an additional deferred compensation if the company is sold or in some way merged with another company. This incentive might remove an executive’s personal incentives to block a potential suitor.
Specific Types of Nonqualified Deferred Compensation Plans
Up to this point, the nonqualified deferred compensation plans have been presented as a general category. This larger group can be subdivided into two smaller categories to help you better understand exactly how these plans function.
The first subcategory of nonqualified plans is called salary reduction plans. You can probably guess from the name how this group functions. It works very much like a 401(k) plan, where the employer takes a portion of the participant’s gross salary and defers it into the nonqualified plan. There is no dollar limit on the deferrals. Sometimes, executives will elect to receive certain types of bonuses in the current period and other types of bonuses as deferred compensation.
The second subcategory of nonqualified plans is called a supplemental executive retirement plan (SERP). The SERP provides an additional income beyond the participant’s normal gross salary. It is not a reduction from the salary, but an addition to it. This is a way to raise the executive’s compensation package up to a competitive level outside the purview of nondiscrimination testing! The SERP essentially provides the missing piece of the compensation puzzle.
There is also a subcomponent of the SERP that is called an offset SERP. An offset SERP will use the nonqualified deferred compensation plan to offset the employer’s qualified plan to provide for a certain income replacement ratio on retirement. The replace ratio is the amount of preretirement income, which is replaced by the income-generating assets during retirement.
Forfeiture Provisions
A forfeiture provision is designed to create the inherent uncertainty necessary for the IRS to not tax the deferred compensation in the current period. Forfeiture provisions are very common in SERPs, but they are much less common in salary reduction plans. The four most common types of forfeiture provisions are vesting schedules, performance conditions, postretirement consulting clauses, and noncompete agreements.
Because ERISA does not apply to the nonqualified deferred compensation plans, companies can establish a vesting schedule that serves their own purposes. They might set a vesting schedule of 5 years, 10 years, or even 15 years! There is no limit beyond the plan administrator’s creative design ideas and what the participants are willing to accept.
A company might set certain performance benchmarks in order to encourage specific goals. This forfeiture provision would help to mitigate the agency conflict, which is when the goals of management can differ from the goals of the owners. A company could say that the balance in a nonqualified plan is subject to complete forfeiture, unless the participant’s division reaches a specific growth target in sales or margin improvement. It is imperative that the participant should have the ability to influence whatever performance metric is chosen. It would be unfair to set the benchmark as a target that they will only hit by chance.
Sometimes, an employee’s contribution to the company is so incredibly valuable (and virtually irreplaceable) that the employer just does not want to let them go. They can place a clause in the nonqualified deferred compensation plan that provides a benefit only if the participant completes a certain amount of consulting work postretirement. This can be an effective way to lock in the key talents for a longer window of time and allow the participant more time to locate and train a replacement.
Another potential forfeiture clause is a noncompete agreement. This would state that the participant would lose all benefits if they work for a competitor within a certain window of time. One caveat is that the window of time must be reasonable, such as a few years. It would not be legal to say that they could never again work for a competitor, period. The noncompete clause will also only work within a specific geographic region. For example, a senior executive at a regional bank could be prohibited, through the nonqualified deferred compensation plan, from working for a competitor within a two-year period of time in the same region covered by the former employer. However, it would be perfectly legitimate for the executive to work for a different regional bank in another part of the country.
Remember that after a substantial risk of forfeiture is removed, the balance in a nonqualified deferred compensation plan is fully taxable to the participant unless they also do not violate the economic benefit rule and the constructive receipt rule.
To offset the effect of these forfeiture clauses, it is common for companies to offer some level of protection for plan participants. The most common is the golden parachute that we already discussed. In the event of a takeover, the participants could be given additional benefits, full vesting, and an immediate payout. Another protective mechanism is that the participants have access to hardship withdrawals. In the event of a hardship withdrawal, the portion of the account that is withdrawn is taxed in the current period, but the remained of the account is not deemed to have violated the constructive receipt rule, and thus trigger taxation of the entire account. The amount of the hardship withdrawal is limited to the dollar amount of the unforeseen immediate financial need. A new flat screen TV for the Superbowl does not qualify as an immediate financial need.
In the event of a legal dispute over the way the plan is functioning or options are applied, there is typically a clause that all grievances will be handled through arbitration. Arbitration is a legal process where a panel of lawyers will assess any legal breaches and impose any requisite financial remedies. This is more cost-effective than going to court.
Design Considerations
From a design perspective, is a nonqualified deferred compensation plan a defined-contribution (DC)-type plan or a defined-benefit (DB)-type plan? The answer is it depends. A salary deferral plan can be thought of as a DC-type plan because it involves participant contributions much like a 401(k) might. On the other hand, an SERP is more like a DB-type plan because the burden of making contributions rests entirely with the employer.
Who can be eligible for a nonqualified deferred compensation plan? Technically, anyone could be included. For reasons discussed later in this chapter, nonqualified plans are usually reserved for only the HCEs, like executives and other key employees.
A nonqualified deferred compensation plan can offer a benefit in the event of either a preretirement death or a documented disability. Typically, the company would remove any forfeiture overlay remaining for the participant.
Offering a benefit for disability can present a tricky challenge if the employer also offers disability insurance. The insurance company providing the disability insurance for employees could see this as duplicate coverage and deny paying the full benefit that the insurance otherwise would have provided. The employer should check with their insurance provider before offering a disability benefit within their nonqualified plan if the potential for duplicate coverage exists.
Funding Issues
A nonqualified deferred compensation plan can be funded, unfunded, or informally funded, which means that funds are reserved on the employer’s balance sheet for the intention of paying benefits in the future.
If the plan is funded, then the employer will have established a trust and contributed all funds into that trust for the sole purpose of making payments to the participants when time comes. This method has the highest level of certainty for the plan participants. They know that the money is available to pay them off when they need it. This funding method would violate the economic benefit rule. This means that as soon as the substantial risk of forfeiture (vesting, etc.) is removed, the money is then fully taxable to the employee. This could result in the receipt of an additional taxable income during their working years when their tax rate is still quite high, thus defeating the whole purpose of the nonqualified plan.
An unfunded plan is easy to understand ... the employer simply does not set aside any current funds to pay the nonqualified deferred compensation. This method does not violate the economic benefit rule, but it also does not provide the participant any measure of safety. They will be paid only if the company can make the payments at some future date. Lowest probability of the current taxation with the highest risk of not being paid.
Informal funding is the middle ground. This is essentially creating a reserve account, which is still accessible by the creditors of the company. The funds in the reserve account can be used to pay benefits if the company does not get sued and does not go out of business. This method will also avoid violating the economic benefit rule.
Company-Owned Life Insurance
Company-owned life insurance (COLI) is one popular way to fund a nonqualified deferred compensation plan. The company must be the owner, not the participant! Companies will often use a whole life product, which will accumulate a cash value, rather than a term life insurance product, which is pure insurance that becomes worthless unless the covered individual dies. The whole point of a COLI is to fund the nonqualified plan in the event of the premature death of a participant.
As described earlier in this chapter, if the plan is funded and the assets increase in value due to investment performance before they are distributed to the participant, then the employer will owe taxes on the growth. Not so with a COLI. Life insurance contracts offer tax-free inside build up, which means that the earnings are tax-free until a life insurance contract is paid out due to either death or the company canceling the policy. The ultimate proceeds from the life insurance contract are tax-free to the company if certain conditions are met. First, the insured individual must be notified that the company is insuring their life, and the participant must consent to the insurance. The second condition is actually a three-way test, and one of the tests must be passed. The tests are (1) that the insured participant must be employed when the insurance is initiated, (2) that the insured was an employee within 12 months of their death, or (3) that the death benefits are paid directly to the participant’s heirs or used to buyout the deceased participant’s ownership interest in the employer.
The company “ownership” portion of the COLI enables the company to borrow against the policy if cash flow were ever to become an issue.
Both the economic benefit rule and the constructive receipt rule can be sidestepped if the life insurance is owned by the company, the premiums are paid by the employer, and the employer is the sole beneficiary. The previous rule about the participant’s heirs being the beneficiary is related to the taxation of the insurance proceeds postdeath. The economic benefit rule and the constructive receipt rule apply when the participant is still alive.
Benefit Security
How safe are the benefits in a nonqualified deferred compensation plan? The answer is it depends. If the plan is funded, it provides the maximum amount of safety for the participants, but it will create a current taxation problem by violating the economic benefit rule. If the plan is unfunded, then there is a very low risk of creating a taxation event, but the participant is at the mercy of the long-term financial strength of the employer. There are three creative funding instruments that can be used to increase the level of security offered to the plan participants. They are rabbi trusts, secular trusts, and surety bonds.
The rabbi trust received its name because it was first used to offer protection to a rabbi’s nonqualified deferred compensation plan in 1981. With this creative funding instrument, the employer will establish an irrevocable trust, which is a trust that cannot be altered after it is created. The catch is that the assets in a rabbi trust must remain available to the creditors of the company. This is accomplished through a special clause in the trust agreement (the actual legal document known as “the trust”). This clause enables the rabbi trust to avoid violating the constructive receipt rule. This instrument does set money aside to ease the participant’s minds, but this only works if the company does not get sued or go bankrupt. From a benefit security perspective, this is better than being unfunded, but not as good as being funded.
Another funding instrument is a secular trust, which is a full-on irrevocable trust. The employer will create a trust and then contribute funds to it that would satisfy the payments due to participants through a nonqualified plan. In this type of trust, the trust’s assets are not available to the creditors of the firm. This offers a great benefit security for the participants. This security comes at a cost ... immediate taxation as soon as any risk of forfeiture is removed. By now, you know that this is opposite to the original intent of the nonqualified plan. For this reason, secular trusts are hardly ever used in practice.
The third creative security instrument is called a security bond, which is a form of insurance against the risk of the participant receiving their payments. A bonding company will sell insurance to the participant. If the company does not make good for whatever reason, then the bonding company will step in and make the required payment. The participant must pay for this protection themself. In order for a bonding company to be willing to offer insurance, the employer will need to have a strong balance sheet, and the bonding company will review annually whether or not they will renew the insurance policy.
Top-Hat Exemption
ERISA-mandated compliance is a big factor in the cost structure of a company’s retirement plan offerings. Anything that can be done to minimize the oversight is a cost-saving must.
There is an option to avoid the ERISA requirements for vesting, participation testing, funding requirements, and the fiduciary standard! It is known as the top-hat exemption. This exemption basically states that if the plan is unfunded (not formally funded) and is only available to a “select group of management and/or highly compensated employees,” then the above-ERISA mandates can be legally avoided.
What if the company said that they wanted to offer their nonqualified deferred compensation plan to all employees? In this case, they have not limited the plan to only a “select group” and therefore, ERISA will apply. This is a big issue! Just consider the impact of applying ERISA funding requirements. If the plan is required to be funded, then the economic benefit rule has been violated and the current taxation of benefits is mandated. Not the intended effect!
The top-hat exemption is one reason why nonqualified deferred compensation plans are primarily offered to only the HCEs.
§457 Plans
The term “nonqualified deferred compensation” is sometimes psychologically synonymous with a §457 plan. In reality, §457 plans are only a subset of the nonqualified marketplace. A §457 plan is simply a nonqualified plan available only to nonprofit companies. Any nonqualified plan that is not a §457 plan is used by a for-profit company.
The reason that a separate category was created is that nonprofit organizations (as a company) do not care about the tax deductions that result when a for-profit company makes a retirement contribution. The employees still care, but it is the businesses that offer the plans and make the decisions. The reality is that nonprofit organizations are, in practice, more likely to use nonqualified deferred compensation plans than their forprofit counterparts.
The first type of §457 plan is called a 457(b) plan, which is also known as an “eligible” plan. This plan type is only available to those who physically provide a service to a nonprofit organization. The salary deferral limit is $18,000 (2016 limit) or 100 percent of the compensation, whichever is lower. Unaffected by the qualified contributions made to a 403(b) of 401(k) plan. Earlier we discussed the constructive receipt rule, which basically says that in order to defer funds from a given year, the employee must elect to do so before the end of the previous year. With a 457(b) plan, employees can make the election month-by-month. In order to defer any money for a given month, they must elect to do so before the end of the previous month. Distributions from a 457(b) plan are only permitted, while the participant is still employed by the company, in the event of an unforeseen emergency (hardship withdrawal) or after they reach age 70.5 should they decide to keep working that long. Just like their for-profit counterparts, in order to avoid ERISA, the top-hat exemption will apply.
The second type of §457 plan is called a 457(f) plan, which is also known as an “ineligible” plan. Think of the “f” plan as having failed a test of some kind. In reality, they have not failed anything (this is just a memory cue). They have chosen to not adhere to the contribution limit applicable to the 457(b) plan. By ignoring the contribution limit, they have now created a taxation event as soon as a substantial risk of forfeiture is removed. This is more so a bonus deferral program than a retirement planning tool.
Executive Bonus Life Insurance
Executive bonus life insurance plans (§162) are another way in which it is perfectly legal for a company to discriminate in favor of the HCEs. Basically, the company decides to offer the employee a life insurance policy, and unlike the COLI, the company does not own the policy. The employee owns their own policy. This is a way for the company to help an employee build cash value in a whole life insurance product and add another layer to their estate plan. The employer will simply pay the employee a “bonus,” which is used to pay a life insurance premium. The employer will receive a tax deduction for the “bonus” and the employee will receive a taxable income.
The employer could elect to pay the actual premium directly to the insurance company, or they could elect to pay the employee who then is responsible for relaying the payment to the life insurance company. If the company chooses this last option, then they typically will gross up the bonus so that the employer is also paying the taxes due by the employee for receiving the “bonus.” This creates a double bonus feature because the company is paying the actual life insurance premiums and they are also paying the taxes associated with the transaction.
Discussion Questions
What are the differences between a qualified and a nonqualified plan?
An employee will not pay taxes on the full value of a nonqualified deferred compensation plan until certain requirements have been met. However, they must pay taxes on the earnings during the deferral period. Is this a correct understanding of how nonqualified deferred compensation works?
Why is the notion of a substantial risk of forfeiture such a major issue for a nonqualified deferred compensation?
Describe the economic benefit rule and its importance.
What is “constructive receipt” and how can it be avoided?
What are the objectives of a nonqualified deferred compensation plan?
What is the difference between an SERP and an offset SERP?
What roadblocks can cause a substantial risk of forfeiture?
What must exist in order for a noncompete clause to be enforceable?
What is the difference between a COLI and executive bonus life insurance?
A company has one employee whose industry contacts have been extremely valuable to the business. The employee is now nearing the normal retirement age, and the company is concerned that they might leave the company through either retirement or attrition. How can a nonqualified deferred compensation plan help the company manage this risk?
Explain the function and purpose of a rabbi trust.
What is the “top-hat” rule and why is it important?
What is the difference between the two types of nonqualified deferred compensation plans that are available to nonprofit organizations?