Nonqualified Deferred Compensation

Question 1

Nonqualified Deferred Compensation

Answer 1

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

Question 2

Does it discriminate?

Answer 2

Yes–provides additional deferred compensation to a select group of executives

Question 3

When is it used? (3)

Answer 3

1. employer wants to provide deferred comp to executives but cant afford a qualified plan
2. employer wants to recruit, retain, rewear, and retire executive talent
3. closely-held corp wants to attract and retain non-shareholder employees

Question 4

What are the plans objectices? (6)

Answer 4

1. Hire and retain key employees
2. Provide performance incentives
3. control the timing of and access to plan funds
4. tax deferral for key employees
5. benefit certainty if this is funded by COLI, Rabbi trust or Secular Trust
6. make the funds available during employment to the extent allowed by the law

Question 5

6 advantages

Answer 5

1. flexible plan design
2. minimal irs, erisa requirements
3. tax deferral
4. use to bind employees
5. provide confidence to employees
6. assets available at all times

Question 6

2 Employer disadvantages

Answer 6

1. tax deduction deferred until income is taxable to employee
2. some employers lack the structure necessary to successfuly use

Question 7

5 employee disadvantages

Answer 7

1. unsecured promised payment
2. reduced confidentiality
3. must try to avoid constructive receipt or benefits will be taxed before receieved
4. must avoid penalties for accelerated payments
5. NOT guaranteed by PBGC

Question 8

5 types of plans

Answer 8

1. Salary continuation plan
2. Supplemental executive retirement plan
3. salary reduction plan
4. excess benefit plan
5. shadow stock arrangements

Question 9

Salary Continuation plan

Answer 9

provides a specified deferred amount payable in the future such as retirement, disability, or death of the employee

Question 10

Supplemental Executive Retirement Plan

Answer 10

a certain type of salary continuation plan ofr a “select group” of management or HCEs

Question 11

What plan is also known as the Top Hat Plan?

Answer 11

SERP

Question 12

Salary Reduction Plan

Answer 12

involves an elective deferall of a specified compensation amount that the employee would have otherwise received

Question 13

Excess Benefit Plan

Answer 13

provides benefits only for executives whose annual projected qualified plan benefits are limited under the dollar amount of IRC

Question 14

3 ways benefits can take form of

Answer 14

• a lump sum payment
• series of annual payments at retirement
• life or joint and survivor annuties

Question 15

Doctorine of Constructive Receipt

Answer 15

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

Question 16

Does a funded or unfunded plan provide more security for the employee?

Answer 16

funded

Question 17

Is a funded or unfunded plan subjedct to ordinary income tax for employee and ERISA

Answer 17

funded

Question 18

5 ways to finance an unfunded plan

Answer 18

1. employer reserve account maintained by employer
2. employer reserve account where employees only advise investment direction
3. Corporate owned life insurance
4. rabbi trust
5. third party guaranty

Question 19

1 way to finance a funded plan

Answer 19

secular trust

Question 20

What kind of trust is a Rabbi trust?

Answer 20

irrevocable

Question 21

What kind of plans are exempt from ERISA?

Answer 21

unfunded excess benefit

unfunded SERP