Non-Qualified Deferred Compensation

A seminar presented by Scott Dondershine, Esq., CPA

Presentation Overview

Benefits of Non-Qualified Plans

Different Types of Non-Qualified Plans

  • Equity Based (Options)
  • Cash Based (Rabbi Trusts)
  • Hybrid (Phantom Stock Plans)

Summary

Benefits - Easier

Not Subject to Qualified Plan Rules

  • Do not have to cover substantially all employees
  • Not Subject to Deferral Limits Imposed by IRS
  • subject to Simplified (Or None) Reporting Requirements

Not Subject to ERISA Rules Since Not Funded

Benefits - Flexibility

Can Discriminate or Favor Certain Employees

  • Plan Provides Overall Rules
  • Agreements can Vary, e.g., vesting or amounts

Can Mix Types of Plans

Some employees Stock Options

Other employees Restricted Stock

Other employees deferral of bonuses using Rabbi Trust

Benefits - Employee Relations

Golden Handcuffs

  • Vesting
  • Forfeiture

Upside Potential

  • IPO
  • Increase in Stock Price

Reward Productive Employees Not All Employees

Benefits - Employee Relations

Tie Payout to Continued Compliance of Non-Compete or Non-Solicitation

  • E.g. Phantom Stock Plan

Build Incentives to Achieve Certain goals or Levels

Benefits - Additional Benefits

Juggle with Qualified Plan Benefits
  • Make Contributions Beyond Qualified Plan Limit
  • Additional Amount in Rabbi Trust!

Types: Equity Based - ISOs

Description

Characteristics

  • Grant (Key Employees)
  • Vesting
  • Forfeiture
  • Acceleration
  • Control
    • Non-Voting Stock
    • Shareholders Agreement

Types: ISOs Continued

Tax Treatment

  • Favorable to Employees Except AMT on Spread
  • Unfavorable to Employers

Restrictions/Disadvantages, Including:

  • FMV Rule
  • Only to Employees
  • Holding Period: 2 Years From Grant; 1 Year from Exercise

Types: Non-ISOs

Similar characteristics But No Requirements

  • FMV Rule N/A--So, Easier to Administer
  • Can Grant to Contractors & Directors

Tax

  • Unfavorable to Employees
  • Favorable to Employers

Types: Restricted Stock

Grant Stock

  • Voting Right on Date of grant

But, Substantial Risk of Forfeiture

Section 83(b) Election

Types: Phantom Stock

Tied to Value of Stock

Payout on Termination

  • Installments
  • Continued Compliance with Employment Agreement

Not for Everybody

Type: Cash Deferred Plans

Rabbi Trusts

  • Named after a Rabbi!
  • Deferral Since Subject to Creditors
  • Grantor Trust
  • No Deduction for Employer Until Income to Employee

Non-Profits:

  • 457(b) - $7,500 (General Limitation)
  • Ineligible - Substantial Risk of Forfeiture

Types: Other

Split Dollar Life Insurance

Annuities

Summary

Benefits:

  • Easier
  • Flexible
  • Employee Relations

Types:

  • Options
  • Restricted & Phantom Stock
  • Cash Deferral