non-qualified deferred compensation plans: what and why?€¦ · non-qualified deferred...
TRANSCRIPT
Non-Qualified Deferred Compensation Plans:
What and Why?
Presented by:Justin W. Stemple
Qualified Plans
� 401(k), 403(b), profit-sharing, and defined benefit plans
� Broad based participation� Limits on contributions and benefits� Immediate deduction + deferred taxation +
tax-deferred earnings
Non-Qualified Plans
� Assorted rules and regulations, 409A� Limited participation� Unlimited benefits� No deduction until paid to employee;
earnings are taxable
Why Non-Qualified Plans?
� Employer�Recruiting/retention of key employees
�Performance incentives�Equity-like compensation
�Early retirement incentives�Golden parachutes
�Golden handcuffs
Why Non-Qualified Plans?
� Employee�Deferred Income & taxation
�Payment for retirement or a specific time or event
Types of Non-Qualified Plans
� Account Balance Plans�Fixed account with earnings
�401(k) style plan
� Nonaccount Balance Plans�Fixed stream of payments�Defined benefit style plan
Types of Non-Qualified Plans
� Salary Reduction Plan� Bonus Deferral Plan� Incentive Plans
�Golden handcuff
�Performance goals
Types of Non-Qualified Plans
� Synthetic Equity� Stock Appreciation Rights� Phantom Stock Plans� Non-dilutive of actual ownership� Aligns interests with shareholders� LLC: equity appreciation rights/phantom equity plans� S Corporations� Consider valuation
Types of Non-Qualified Plans
� Supplemental Executive Retirement Plan� “Make up” for benefits lost under qualified
plans due to IRS limits� Compensation limits or excluded compensation� Elective deferral limits� Nondiscrimination limits
� Excess Benefit Plan�415 excess only
Plan Design Issues
� Contributions�Employee salary or bonus deferrals
�Employer contributions� Discretionary � Formula� Percentage of pay� Match� Cash or Stock
Plan Design Issues
� Funding� Investment
�Who decides?�How to invest?
� Hypothetical investments� Fixed rate of return� Phantom equity
Plan Design Issues
� Vesting�No limits
�Rolling vesting permitted�Vesting by time or performance
� Immediate vesting upon retirement, death, disability, or change in control
Plan Design Issues
� Forfeiture Events�Termination for cause
�Covenant not to compete�Confidentiality
�Non-solicitation of customers�Non-solicitation of employees
� Intellectual property agreement
Plan Design Issues
� Payment Events� Separation from service� Death � Disability� Change in control� Specific age or time� Unforeseeable emergency
Plan Design Issues
� Payment Form�Lump sum
� Installments�Annuities
�Cash or stock
Plan Design Issues
� Elections�Employee deferrals
�Time of payment�Form of payment
�Further deferral
Tax Treatment
� Employee�Generally no tax when plan is established if
an unsecured promise to pay�Securing the promise to pay may create a
taxable event�Constructive receipt
� Employer�Deduction when employee is taxed
Funding
� Funded v. Unfunded�Certainty of payment v. deferred taxation
�Taxable entities� Actual or constructive receipt triggers tax� Vesting is irrelevant
�Tax-Exempt entities� Substantial risk of forfeiture� Vesting = taxation
Funding
� Employer Alternatives�Unfunded
�Company account�Rabbi trust
Funding
� Rabbi Trusts�Employer funded�Not taxable to employee upon funding�Employer may not use assets�Subject to the claims of the employer’s
creditors upon bankruptcy/insolvency� IRS model trust�Springing trust
ERISA
� ERISA dictates participation, vesting, funding and fiduciary standards if applicable
� “Top-hat” exemption for unfunded plans that benefit only a “select group of management or highly compensated employees”
� Minor reporting formality – “top hat” letter
M&A
� Golden parachutes
� Golden handcuffs� 280G
� If change in control benefits exceed three times the employee’s base amount (five year average compensation), there is a 20% excise tax on amounts more than one times average compensation
� Gross-up v. cap
(Dreaded) § 409A
� Comprehensive and complex regulation of all non-qualified deferred compensation plans
� Funding restrictions
� Deferral elections� Time and form of payment� Keys:
� Material terms must be fixed in writing� Limited ability to “change the deal”
