Rabbi Trust
5.78
Provides more security for the payment of benefits promised to an exec in a Nonqual. Deferred Comp Plan without triggering current recognition.
- funds aren’t avail. for other purposes
- protected from merger or acquisition
- “substantial risk of forfeiture”: funds still accessible by creditors in insolvency
Secular Trust
5.78
An irrevocable trust established by an employer to fund deferred compensation for employees.
It isn’t subject to the company’s creditors so there isn’t significant risk of forfeiture, and so it’s considered construct receipt, i.e., current compensation, and is taxable when funded (unlike a Rabbi Trust)
When to rec a qual. vs non-qual plan?
You can pick 2 of 3 options:
1. Currently deductible to Company
2. Currently non-taxable to Employee
3. Can discriminate
If you pick:
1 & 2… Qual or Tax-Advantaged (SEP/SIMPLE) Plans
1 & 3… Non-qual. Section 162 Bonus Plan
2 & 3… Non-qual. Deferred Comp. Plan
Bargain Element
5.86
For a stock option:
Bargain Element = (FMV at Exercise - Exercise Price) × Shares Exercised
i.e., the difference between the FMV of the stock at the time of exercise and the option’s exercise (or strike) price
NQSOs & ISOs
5.86
Section 162 Plan
What
* Large cash value life insur.
* Exec owns policy & names benes.
* ER pays premiums as bonus comp.
* Exec pays taxes on premiums.
Benefits
* Death benefit -> tax-free
* Exec can access cash value
SERP
Supplemental Executive Retirement Plans - typically a promise to pay additional compensation contingent on tenure or goals, typically have a vesting schedule
A type of Non-Qual. Deferred Comp Plan
Top-hat Plans
Another term for Supplemental Executive Retirement Plans
Excess Benefit Plans
A type of Non-Qual. Deferred Comp Plan that mirrors a qualified plan benefit formula (but without the limits)
A type of Non-Qual. Deferred Comp Plan
Non-Qual. Deferred Comp Plan
- Could be called a Top-Hat Plan, Excess Benefit Plan, or SERP (Supplemental Executive Retirement Plan)
- No rules, no restrictions, can be selective, no formal funding
- Goal: avoid Construct Receipt (and hence avoid Current Taxation) so their must be Substantial Risk of Forfeiture
Section 83(b) Election with restricted stockª
- Election for recipient to pay taxes at the time of the grant based on the FMV at grant
- Beneficial if the stock is expected to increase significantly prior to becoming vested
- Also establishes the holding period for tax purposes in the future sale of the stock
How much ISOs can vest in any given year?
$100K can vest/become exercisable within a given year. The excess auto-converts to NQSOs.
