DEFERRED COMPENSATION PROS & CONS GAIN CONTROL. berrydunn.com

Transcription

1 DEFERRED COMPENSATION PROS & CONS berrydunn.com

2 Just what is deferred compensation? Service provider has a legally binding right during the current taxable year to compensation that is (or may be) payable in a future taxable year

3 Qualified Plan vs. Non-qualified deferred compensation Qualified Plan deferred compensation 401(k) and 403(b) deferrals Yes 401(k) and 403(b) employer contributions? Hmmm... Defined Benefit Plan Hmmm... Non-qualified deferred compensation (NQDC) Stock appreciation rights Yes Supplemental executive retirement plan Yes Incentive stock option (ISO) No

4 Qualified vs. Non-qualified deferred compensation The single major tax difference: Qualified deferred compensation Income tax is deferred by participant Employer takes current wage expense deduction Non-qualified deferred compensation Income tax is deferred by participant Employer deduction is deferred (until income recognition)

5 Qualified vs. Non-qualified deferred compensation Who can implement non-qualified deferred compensation? Any entity Corporations (C or S) Partnerships LLCs Whether for-profit or not-for-profit Large or small

6 Pros of Non-qualified deferred compensation Tax code qualified retirement plan rules do NOT apply No minimum participation rules No non-discrimination rules No minimum vesting rules No distribution rules for the most part (409A!) ERISA rules generally do NOT apply Must file Statement to procure 5500 exemption (often forgotten)

7 Pros of Non-qualified deferred compensation Employer can generally pick and choose whom to cover Select group of HCEs or Management Generally, no minimums or maximums on amounts deferred Plans can provide for EE deferrals and/or ER contributions A potential way to provide a piece of the action synthetic equity Stock Appreciation Rights (SARs) Phantom Stock Potential FICA savings (early inclusion rule) Great flexibility

8 Cons of Non-qualified deferred compensation It s still compensation! Ordinary income tax rates FICA applies Assets are subject to creditors until distributed (plan must be unfunded ) No ability to roll distributions over to an IRA or similar vehicle

9 Cons of Non-qualified deferred compensation Employer must defer tax deduction Liability on Employer s balance sheet Can present a future cash drain if not properly planned for Section 409A!

10 Cons of Non-qualified deferred compensation How does Section 409A change the landscape? Introduces formalities that MUST be followed Draconian penalties for failures Code Section and Regulations are exceedingly complex No Employers are exempted (large, small, for-profit, nonprofit) BUT Work with a good advisor and all should be fine.

11 Cons of Non-qualified deferred compensation A major Problem specific only to non-profit entities: Substantial Risk of Forfeiture This alone is a killer for many non-profits So what are non-profits doing?

12 Non-qualified Deferred Compensation Being used more than ever Synthetic equity is very popular Section 409A is not proving to be a deterrent (nor should it) There is lots of room for creativity Any entity can make use of NQDC Watch out for hidden deferred compensation Don t let the tax tail wag the dog!