IX. Deferred Compensation And Non Qualified Plans

An employer might favor a non-qualified plan over a qualified plan because:

  • More design flexibility with non-qualified plan
  • Typically has lower administrative costs
  • Employers can generally exclude rank-and-file employees from non-qualified plan

Non-qualified plans do not allow the employer to take an income tax deduction until the employee recognizes the income.

Deferred compensation plans:

  • The contributions to the plan are currently subject to payroll taxes
  • The employer can deduct the contributions to the plan at the time of the contribution

Rabbi Trusts:

  • Participants have security against the employer's unwillingness to pay
  • Provide tax deferral for participation
  • Do not provide security against employer bankruptcy or current tax deductions for the employer

A rabbi trust is a trust established and sometimes funded by the employer that is subject to the claims of the employer's creditors, but any funds in the trust cannot generally be used by or revert back to the employer.

A secular trust calls for an irrevocable contribution from the employer to finance promises under a non-qualified plan, and funds held within the trust cannot be reached by the employer's creditors.

When an employer has contributions to secular trusts for employee-participants of a non-qualified deferred compensation agreement:

  • Participants have security against an employer's unwillingness to pay at termination
  • Participants have security against an employer's bankruptcy
  • Employers can take a current income tax deduction
  • Participants lack a substantial risk of forfeiture and cannot provide employees with a tax deferral

Incentive Stock Option Plans

  • Employee will be required to hold any Incentive Stock Options for more than a year after exercise and more than two years from the grant date to have long-term capital gains
  • The fair market value of stock for which an ISO is exercisable for the first time any calendar year exceeds $100,000, the excess is treated as non-statutory stock options.

Phantom Stock Plans:

  • Benefits are paid in cash
  • There is no equity dilution from additional shares being issued

Employee Stock Purchase Plan (ESPP):

  • The price may be as low as 85% of the stock value
  • The annual limit for each employee is $25,000

83(b) Elections taken at the date of the award permits losses after the right to the stock has vested. However in the year the 83(b) election is taken, there will be a W-2 Income in the value of the stock at that date.

Tax considerations of non-qualified retirement plans under IRS regulations requires an amount become currently taxable to an executive even before it is actually received if it has been "constructively received."

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