Page 341 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 6. Employee Benefits and Perquisites 327

Although a CODA could be a stand-alone plan, many companies combine it with their
401 defined contributions, which use after-tax contributions. Thus, the 401(k) payroll deduc-
tion would be matched in the same manner as the after-tax savings plan deduction. The
maximum annual deduction for 2006 was $15,000 for those under age 50 but $20,000 for
those aged 50 and older. Where a company has a profit-sharing plan, the employee makes
similar deferrals, although typically, these are not matched since the profit-sharing amount
itself is the company contribution.
Qualified CODAs are of limited value to highly compensated executives because of their
low limit on annual deferrals. However, the amounts allowed by plan formula but in excess
of the annual limit may be deferred into a nonqualified plan. Typically, these deferrals would
either be in units (rather than actual shares of company stock, to avoid economic benefit)
and/or the equivalent of U.S. government short- or long-term debt instruments. Being non-
qualified, the company cannot take a tax deduction until recognized by the executive. But
they have to be viewed carefully in light of the non-qualified deferred compensation section
of the 2004 American Jobs Creation Act.
IRS Revenue Ruling 98-30 permitting the employer to automatically include an employee
in the 401(k) plan was expanded in 2005 with a 3 percent automatic contribution as long as
there is sufficient time for employees to opt out if they desire. To be excluded, the employee
must opt out by making a negative election. This action eases administrative burden and
improves the likelihood of a high level of employee participation.
Similar to Section 401(k) plans are 403(b) plans (for not-for-profit organizations) and 457
plans (available for government workers).
The Roth 401(k) is similar in many respects to a traditional 401(k) except for two major
differences. With a Roth, contributions are from after-tax dollars, and all withdrawals
(including the gains) are tax free. Employees typically have access to the same investment
options. However, employee contributions to the Roth, and the pretax 401(k), 403(b), and
457 plans, cannot exceed $15,000 a year ($20,000 if age 50 or older). Tax-free withdrawals
are permitted after age 59 1/2 and at least five years in the plan. But unless Congress extends
the law, this plan will disappear after 2010.
Employee Stock Purchase Plans. These plans enable an employee to purchase company
stock by authorizing payroll deductions for a stated period of time. Although not a retirement
plan per se, it is an investment opportunity to supplement other sources of retirement income.
Section 423(b)(1) through (9) of the IRC cites the nine requirements that must be met
for the plan to be tax qualified:
1. Only employees of the company and its subsidiary corporations are eligible.
2. Approval of the shareholders is required within 12 months of the date the plan is
adopted by the granting corporation.
3. Employees owning more than 5 percent of the voting stock of the company are not
eligible. See Section 424(d) for rules of stock ownership.
4. Options to purchase must be given on a nondiscriminatory basis, although it is permis-
sible to exclude (a) those with less than two years of service, (b) those working 20 hours
or less a week, (c) those working not more than five months a year, and (d) highly
compensated employees as defined in Section 414(q) of the IRC.
5. Participating employees must have the same rights and privileges, but the amount of
stock available to employees may vary directly with their compensation. Furthermore, a
maximum amount of stock that may be purchased by any individual can be established.