Executive Compensation & Nonqualified Plans Flashcards

Which IRS code section governs nonqualified deferred compensation plans and imposes strict rules on deferral elections and distributions?

Answer: Section 409A

Section 409A governs nonqualified deferred compensation, requiring initial deferral elections before compensation is earned and limiting permissible distribution events.

A Supplemental Executive Retirement Plan (SERP) is best described as:

Answer: A nonqualified plan that provides retirement benefits above qualified plan limits

A SERP is a nonqualified plan that supplements qualified plan benefits, typically provided to key executives whose retirement income would otherwise be limited by IRS caps.

Under ERISA, a 'top-hat' plan is exempt from most ERISA requirements because it:

Answer: Covers only a select group of management or highly compensated employees

Top-hat plans are exempt from ERISA's vesting, funding, and fiduciary requirements because they cover only a select group of management or highly compensated employees who can negotiate for themselves.

A rabbi trust used in a nonqualified deferred compensation plan provides:

Answer: A tax-free distribution to the executive upon retirement

A rabbi trust protects deferred compensation from employer discretion (e.g., a change of heart by a new owner) but assets remain subject to claims of the employer's general creditors in bankruptcy.

Which of the following is the primary disadvantage of a secular trust compared to a rabbi trust for nonqualified deferred compensation?

Answer: The executive is taxed on contributions when they are made to the secular trust

Contributions to a secular trust are immediately taxable to the executive because assets are beyond the reach of the employer's creditors, triggering constructive receipt.

Split-dollar life insurance arrangements in the executive benefits context are primarily used to:

Answer: Share the cost and benefits of a permanent life insurance policy between employer and executive

In a split-dollar arrangement, the employer and executive share the premium costs and policy benefits of a permanent life insurance policy, providing death benefit protection and cash value accumulation.

Under the economic benefit doctrine applicable to nonqualified plans, an executive is taxed when:

Answer: The executive receives a transfer of property or an economic benefit with ascertainable value

The economic benefit doctrine taxes the executive when a taxable economic benefit of ascertainable value is conferred, even if no cash is received, such as when assets are placed in a secular trust.