Page 96 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

82 The Complete Guide to Executive Compensation

“Employee Benefits and Perquisites,” for a description). These plans are probably not
very attractive to the executive because their qualified nature limits the extent of bene-
fits the company is prepared to give—since they must essentially apply to all employees.
Other than for the basic retirement benefit, this is not an attractive alternative to either
employer (due to cost) or executive (due to limitation on amount of benefit).
2. Funded, nonqualified, forfeitable plan. This plan is similar to the one just described
except that the employer can tailor the plan to a small group of employees or even one
individual. It is the previously defined wet rabbi trust. Payments are secured by a non-
qualified trust, insurance contract, or reserve account. Since the payments are subject to
a substantial degree of forfeiture, the employee has no income tax liability until such
restrictions are removed. However, the employer is similarly barred from taking a tax
deduction until the restrictions are removed. Thus, while this plan may be attractive to
the employee, it is not very attractive to the employer (who must set aside nondeductible
dollars to fund the benefit).
3. Funded, qualified, nonforfeitable plans. This is the same as the first plan described
except that employees have 100 percent, immediate vesting. Thus, it is even less attrac-
tive to employers than the first alternative, for in addition to all the limitations of a
qualified plan, the cost of this type of plan is even greater since there are no forfeitures
that can be used to offset funding the nonforfeited benefits. Since employers will be
forced to lower benefits in designing such a plan, it is not very attractive to executives
either because, of the eight alternatives, it will probably provide the lowest benefit for
the highly paid.
4. Funded, nonqualified, nonforfeitable plan. Although at first glance this plan should
be the most attractive to the executive (since risk is eliminated and the nonqualified
nature permits a generous benefit design), it is rarely used. The reason is that because it
is funded and nonforfeitable, the IRS will consider payments made by the employer to
the “fund” to be currently taxable income to the employee if the funds are owned by the
executive. Thus, the employee will have a tax liability without the benefit of having
received the payments! This is an example of the earlier-described secular trust.
5. Nonfunded, qualified, forfeitable plan. By terms of ERISA, it is not possible to have
a qualified, nonfunded plan. To be qualified it must be properly funded. Thus, this
alternative does not exist.
6. Nonfunded, nonqualified, forfeitable plan. Until recent years, this probably was the
most typical form of executive deferral. Because this plan is nonqualified, it enables the
employer to design a very attractive personal package. Because it is nonfunded and for-
feitable, the executive accepts the unsecured, tenuous nature of future payments in
exchange for no current tax liability. The company has no tax deduction until payments
are made, but since it also has no funding requirement, there is no immediate cash flow
problem. Among the most common are excess or restorative plans, which deal with
Section 415 and 401 (k) limits. They are sometimes called mirror plans because they mir-
ror, or look like, their qualified-plan counterparts except they begin where the others
end, providing the full benefits stated under the company qualified plan before the legal
stated cutoffs are imposed.
7. Nonfunded, qualified, nonforfeitable plan. By terms of ERISA, it is not possible to
have a nonfunded, qualified plan. To be qualified it must be properly funded. Thus, this
alternative does not exist.