Tax Qualified Retirement Plans (QRP)

Transcription

1 NonQualified Deferred Compensation Operational Issues Presented by: Michael G. Curran, CFP, CLU, ChFC, MSFS, M.Ed CAPTRUST Financial Advisors Henry Talavera Hunton & Williams LLP November 19, 2010 Southwest Benefits Association Tax Qualified Retirement Plans (QRP) QRPs are the foundation for employee retirement income planning Well managed QRPs + Social Security benefits typically meet the retirement income goals for most employees Standard Goal: 80% + / - replacement of pre-retirement income Aon / Georgia State retirement income replacement study, 2004 Income tax benefits for the company and the employee Retirement assets protected from General Creditors Southwest Benefits Association

2 The Challenge: Highly Compensated EEs A group of valuable key employees limited by IRS restrictions $110,000 for 2011 (prior year total compensation) HCE s are restricted by QRP & Gov t Sponsored contribution limits HCE s are restricted by QRP & Gov t sponsored compensation limits Limits create a Retirement Income Gap Defined: The Retirement Income Gap is the difference between the retirement income goal and the retirement income projected from QRPs and Gov t supported retirement plans Southwest Benefits Association 2011 Retirement Plan Limits 2.0% 401(k) Average Deferral Percent Test $ 16, (k) annual contribution limit ($22,000 if age 50+) $245,000 Maximum QRP eligible compensation $ 49,000 Maximum profit sharing contribution $195,000 Maximum defined benefit payout (62) $106,800 Compensation eligible for Social Security benefits No IRA deduction based on AGI Southwest Benefits Association

3 Retirement Income Gap 120% Income Replaced Goal 100% 80% 60% 40% 20% 0% Qualified Retirement Benefits Social Security Retirement Benefits Less INCOME REPLACEMENT GOAL Compensation GAP $245,000 $106,800 More This information is from a general Replacement Ratio Calculator with Social Security information from the Annual Statistical Supplements to the Social Security Bulletin The graphic is intended to demonstrate the potential impact that QRP and Social Security limits have on Highly Compensated Employees at various income levels. For more information on your specific circumstances, please consult with a professional advisor. Southwest Benefits Association Solution: NQDC Plans Adopted Since 1994 # of Plans NQDC source: U.S. Dept. of Labor Southwest Benefits Association

4 NonQualified Deferred Compensation NonQualified A default term used for plans that do not intend to Qualify for full ERISA protection or a current income tax deduction Deferred For 409A purposes: The deferral of taxable compensation for more than 2 ½ months following the calendar year it was earned For ERISA purposes systematically defers compensation until termination of employment or beyond Severance benefits - may be welfare benefits or deferred comp? Compensation W-2 or 1099 compensation. Typically segmented by Class into base salary, bonus, LTIP, commissions, performance, etc. Southwest Benefits Association ERISA NQDC Exemptions Top Hat Exemption Guidelines: Select group of highly compensated or management employees - All of it is uncertain > $110,000 compensation (414(q)(1)(B)), some courts say determination is based upon a comparative analysis Management employees can be covered < 10% to 15% of all employees - less than 10% is ideal Ave. HCE Comp 3 X the Ave. of Non-HCE Comp if highly compensated Ability to influence compensation generally and perhaps plan design Less than all highly compensated or management should be included. Southwest Benefits Association

5 Five (5) Components of a Successful NQDC Plan Strategy 1) lan Design 2) lan Financing Unfinanced Mutual funds / securities Life insurance 3) lan Level Administration & Vendor Selection Administration Rabbi Trustee 4) nvestment Advice Retirement Committee Menu selection and monitoring Participant Investment advisory services (Comprehensive) Southwest Benefits Association Component #1: Plan Design Contracts & Similar Contracts with providers should be carefully reviewed Plan documents should meet intended goal either be a bonus plan or an ERISA plan Consider legal entity generally partnership, S-corporations or partnership entities provide no tax benefits for the business owner(s) 10 Basic Design Considerations Eligibility Define Compensation Employee Deferrals Company Deferrals Vesting Distribution events Distribution options Plan financing Investment menu Security mechanisms Southwest Benefits Association

6 Component # 2: Plan Financing A NQDC plan is technically an unfunded, unsecured contractual benefit liability - No corporate or other guarantees by any person The company uses one or more of the following three methods to finance the long-term benefit liability: Unfinanced Mutual funds / securities Life Insurance The best approach (lowest long-term cost) is based on specific company economic variables including: Marginal income tax rate Cost of cash Earnings assumption Timing of benefits and liquidity Selection of Security mechanisms Southwest Benefits Association Component # 3: Administration NQDC Plan Administration Small universe of quality NQDC administrators Pricing Benchmarking (competitive market) Website portal capabilities Plan Documentation Prototype documents Custom documents Integrate with administration capabilities Rabbi Trustee Trust document Pricing QRP Integration Single sign on web portal Consolidated statements Southwest Benefits Association

7 Component # 4: Investment Advice Retirement Committee Goal development Investment Policy Statement Investment menu selection Investment menu research and monitoring Select Group of Highly Compensated or Management Employees Goal development Investment Policy Statement? Investment Portfolio development Consolidated portfolio development Investment menu research and monitoring Southwest Benefits Association Component # 5: Participant Education Plan level education (Q & NQ) Investment education & Advice Retirement planning education Estate planning education Southwest Benefits Association

8 Severance Pay Issues Severance Benefits and 409A Rules of Thumb for Analysis If severance benefits are fully payable in year promise arose no 409A If severance benefits are payable more than 2.5 months after the end of the year and/or certain other welfare benefits are included, then perhaps subject to 409A for certain executives if no involuntary termination of employment. Involuntary termination is a facts and circumstances determination Uncertain what providing health and life insurance and other benefits in a severance agreement does to 409A benefit Determine if severance pay exception exists under 409A for severance pay plans so no benefits subject to 409A If benefits are subject to 409A make sure that timing of release is not open ended (i.e., the executive cannot control the timing of the payment). Example, the executive waits 6 months to sign. Southwest Benefits Association Thank You For Attending Q & A Southwest Benefits Association

9 Southwest Benefits Association 21st Annual Employee Benefits Conference for Practitioners and Plan Sponsors Operational Issues and Nonqualified Deferred Compensation Plans Prepared by: Henry Talavera Hunton & Williams, LLP Suite Ross Avenue Dallas, Texas Updated Top Hat Plan Cases for Keeping Your ERISA Top Hat On: Designing and Wearing a Top Hat Plan To Avoid Being Hauled Into Court, Benefits Law Journal (2004) 1. Sznewajs v. U.S. Bancorp Amended and Restated Supplemental Benefits Plan, 572 F.3d 727, (9th Cir. 2009) (adhering to the Firestone deferential standard of review and holding that the administrator did not abuse its discretion when it interpreted ambiguous terms in the top hat plan document regarding entitlement to spousal benefits). 2. Paneccasio v. Unisource Worldwide, Inc., 532 F.3d 101, 111 (2d Cir. 2008) (upholding the administrator s decision that early retirement package benefits were not payable after termination of deferred compensation plan because there was no guarantee of benefits with respect to early retirement package and plaintiff s reliance on his own misreading of the ERP was unreasonable). 3. Alexander v. Brigham and Women s Physicians Organization, Inc., 513 F.3d 37, (1st Cir. 2008) (holding that the wide compensation disparity between participants and nonparticipants evidences an intent to create a top hat plan and determining that the more natural and sensible reading of the statute is that a plan is maintained for a group of employees only if those employees realistically have the capacity to benefit from it. The ability to influence terms of deferred compensation plan individually or collectively is not critical to determining whether a select group exists). 4. Bakri v. Venture Manufacturing Co., 473 F.3d 677, 680 (6th Cir. 2007) (holding that the plan was not a top hat plan because participants included employees who had no supervisory, policy making, or executive responsibility, and had little ability to negotiate pension, pay or bonus compensation ). 5. Craig v. Pillsbury Non-Qualified Pension Plan, 458 F.3d 748, 754 (8th Cir. 2006) (holding that a top hat plan administrator cannot surreptitiously reinterpret an unambiguous plan terms regarding definition of compensation. Compensation unambiguously included bonuses ). 6. Eastman Kodak Company v. STWB, Inc., 452 F.3d 215, 221, 223 (2d Cir. 2006) (holding that the Department of Labor s deemed exhaustion rule applies to top hat plan cases, 1

10 but that a claimant is not required to exhaust a claims procedure that was adopted only after a suit to recover benefits has been brought ). 7. In re IT Group, Inc., 448 F.3d 661, (3d Cir. 2006) (holding that deferred compensation plan accounts were subject to the claims of the employer s creditors in a bankruptcy case, because no funds were ever deposited into the established trust and there was no res separate from the company s general assets, even though the plan document required the administrator to establish a secular trust). 8. Koenig v. Automatic Data Processing, 156 Fed. Appx. 461, (holding that a severance plan between a company and its senior vice president of operations constituted a top hat plan with terms reviewable under federal common law although plan was a welfare plan). 9. Callan v. Merrill Lynch & Co., 2010 U.S. Dist. LEXIS 89997, at *22-25 (S.D. Cal. Aug. 30, 2010) (holding that an executive awards program was not subject to ERISA because it was created to incentivize performance, did not have a retirement purpose, and did not provide a systematic deferral of compensation. Also, the court confirmed that ERISA s forfeiture provisions under Title II of ERISA are inapplicable to top hat plans ). 10. MacDonald v. Summit Orthopedics, Ltd., 681 F. Supp. 2d 1019, 1024 (D. Minn. 2010) (holding that the employer has the burden of showing that a plan is a top hat plan and if an employer cannot show that the plan was offered only to a select group of employees the plan is not a top hat plan). 11. Houston v. Saracen Energy Advisors, LP, 2009 U.S. Dist. LEXIS 26307, at *11, 14, (S.D. Tex. Mar. 27, 2009) (holding that a phantom stock plan was not a top hat plan, although the employer filed a top hat statement, because there was no systematic deferral of compensation to termination of employment or retirement). 12. Page v. Bancroft Neurohealth, Inc., 575 F. Supp. 2d 664, (E.D. Pa. 2008) (refusing to hold that a severance plan constituted a top hat plan because there was no deferral of compensation). 13. Hay Group, Inc. v. E. Webb Bassick IV, 571 F. Supp. 2d 845, (N.D. Ill. 2008) (refusing to dismiss a top hat plan participant s estoppel claim based on oral promises because top hat plans are not subject to a strict writing requirement). 14. Fishman v. Zurich American Insurance Co., 539 F. Supp. 2d 1036, (N.D. Ill. 2008) (holding that all employees eligible to participate in a top hat plan need not be highly compensated or management employees if those employees do not actually participate in the top hat plan). 15. Straney v. General Motors Corp., 2008 U.S. Dist. LEXIS 3212, at *9-14 (E.D. Mich. Jan. 16, 2008) (holding that a participant may not assert an estoppel claim based on oral 2

11 modifications to a top hat plan when the plan documents are unambiguous and when the plan documents expressly forbid oral modifications). 16. Evanoff v. Banner Mattress Company, Inc., 526 F. Supp. 2d 810, (N.D. Ohio 2007) (holding that an intended severance agreement was not an ERISA severance plan because it did not require extensive or complex on-going administration, but holding that the part of the severance agreement was a top hat plan because of its deferred compensation component). 17. Parlanti v. MGM Mirage, 2007 U.S. Dist. LEXIS 20003, at *17-21 (D. Nev. Mar. 20, 2007) (permitting plaintiff s breach of fiduciary duty claims to proceed because plan was not a top hat plan, even though the company intended it to be such, because there was no evidence that only a select group of employees participated and no evidence that the plan was an unfunded arrangement). 18. Guiragoss v. Khoury, 444 F. Supp. 2d 649, (E.D. Va. 2006) (holding that a pension plan was not a top hat plan because, although only 4 employees participated and the plan was unfunded, the participants were not management or highly compensated employees and did not have a level of influence that allowed them to negotiate a favorable agreement). 19. Foley v. American Electric Power, 2006 U.S. Dist. LEXIS 8934, at *16-17, 25 (S.D. Ohio Mar. 7, 2006) (holding that a top hat plan may provide for setoff in the event that a participant is terminated for misconduct or disloyalty and otherwise causes damage to the employer). 20. Boulet v. Fluor Corporation, 2005 U.S. Dist. LEXIS 29973, at *36-41 (S.D. Tex. Oct. 31, 2005) (applying the doctrine of substantial compliance to hold that a participant complied with the beneficiary designation requirements in the top hat plan). 21. In re Colonial Bancgroup, Inc., 2010 Bankr. LEXIS 2031, at *22-24, 28-31, 36 (M.D. Ala. June 25, 2010) (holding that the assets of a deferred compensation plan were subject to the claims of the company s general creditors, notwithstanding the fact that only one participant had substantial bargaining power, because only key executives were participants and bookkeeping accounts were not dispositive of participant ownership) EMF_US v1 3

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