Are There Securities Regulation Issues With Respect to Nonqualified Deferred Compensation Plans?

Are There Securities Regulation Issues With Respect to Nonqualified Deferred Compensation Plans?

The answer is uncertain. At a meeting of the Securities and Exchange Commission (SEC), an SEC spokesperson stated that the SEC considered all nonqualified deferred compensation plans (with certain exceptions noted below) to be registerable and indicated that the SEC would be issuing a formal statement on its position. As of the date of this printing, that statement has not been issued. It is possible that the SEC may require the registration of nonqualified deferred…

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Can a Tax-Exempt Organization Implement a Nonqualified Deferred Compensation Plan?

Can a Tax-Exempt Organization Implement a Nonqualified Deferred Compensation Plan?

Yes. However, nonqualified deferred compensation plans of tax-exempt organizations are subject to special rules per Code section 457(f). This Code section stipulates that ineligible deferred compensation plan benefits are included in gross income in the first taxable year in which there is no “substantial risk of forfeiture” of the rights to such compensation. Thus, these plans are subject to more onerous requirements than plans of for-profit employers, in which benefits aren’t currently taxed as long…

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Can Nonqualified Deferred Compensation Plans be Used by a Partnership?

Can Nonqualified Deferred Compensation Plans be Used by a Partnership?

A partnership or LLC, for tax purposes, is essentially a conduit through which the income and deductions of the business flow directly to the owners. Income tax is imposed on each individual owner’s distributive share of the business’ income at the tax rate payable by each owner as an individual. The key point to note is that income tax is imposed whether or not that share is, in fact, distributed by the business to the…

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Does it Make Sense to Voluntarily Defer Compensation?

Does it Make Sense to Voluntarily Defer Compensation?

Many attorneys and accountants have asked just the question if it makes sense to voluntarily defer compensation. Understanding the complexity of the answer can help make a better policy decision, that results in a better outcome for the policy owners. In most cases, the answer is a very emphatic “YES!” Here are some of the factors to consider: On the other hand, the employer can use the money it has on hand but is not…

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What is the Economic Benefit Theory?

What is the Economic Benefit Theory?

Under the economic benefit theory, an employee is currently taxable whenever he receives something of value that is the equivalent of cash. In other words, if a compensation arrangement provides a current economic benefit to an employee, the employee must include the value of the benefit in income, even if there is no current right to receive cash or other property. The employee need only receive the equivalent of cash—something with a current, real, and…

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How Pension Law Affected Nonqualified Deferred Compensation

How Pension Law Affected Nonqualified Deferred Compensation

The trend of tax law in the qualified retirement plan area is one of increasing costs, increasing limitation on the amount of benefits that may be provided to highly paid and owner-employees, and decreasing employer discretion and control. Planners should point out that each of the following points pertaining to changes in the qualified retirement plan area makes nonqualified plans an appealing alternative: First, regardless of how much the retiree was earning prior to retirement,…

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Where Does Life Insurance Fit in a Nonqualified Deferred Compensation Plan?

Where Does Life Insurance Fit in a Nonqualified Deferred Compensation Plan?

Life insurance is the tool of preference to finance an employer’s promises under a nonqualified plan. Typically, the employer purchases a life insurance policy on the life of each covered employee. The employer owns each policy and names itself the beneficiary. The employee is given no rights in the policy and no right to name or change the beneficiary of the policy. In essence, the policy is held as a key employee contract, and will…

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Financing Vehicles With the Nonqualified Deferred Compensation

Financing Vehicles With the Nonqualified Deferred Compensation

The use of the term “finance” is a reminder that the distinction between financing and funding is an important one. There is a way to finance the employer’s obligations without the tax and ERISA problems associated with a funded plan: keep assets in the fund accessible to the employer and its creditors and provide no explicit security to the employee beyond that provided to other creditors of the employer. Note that, although for many purposes,…

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The Constructive Receipt Doctrine of Nonqualified Deferred Compensation

The Constructive Receipt Doctrine of Nonqualified Deferred Compensation

Under the constructive receipt doctrine, an amount becomes currently taxable to a cash basis taxpayer, even before it is actually received, if it is credited to the employee’s account, set aside, or otherwise made available to the employee. Once income is unconditionally subject to the taxpayer’s demand, that income must be reported, even if the taxpayer has not chosen to reduce that income to his possession. Amounts due from the employer will be includable in…

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Tax Implications of Nonqualified Deferred Compensation

Tax Implications of Nonqualified Deferred Compensation

In a properly drafted plan (one which avoids constructive receipt, the economic benefit doctrine, and Code section 83, and is compliant with Code section 409A—see below), the employee will not be taxed until benefits are actually received, at which time he reports the benefits as ordinary income. Amounts received from the plan by beneficiaries are taxable as received at ordinary rates, with one exception: to the extent that the inclusion of the benefit results in…

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