CEBS Executive Compensation & Nonqualified Plans 1

Question 1

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

Accepted Answer

Section 409A

Answer

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

Question 2

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

Accepted Answer

A nonqualified plan that provides retirement benefits above qualified plan limits

Answer

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.

Question 3

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

Accepted Answer

Covers only a select group of management or highly compensated employees

Answer

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.

Question 4

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

Accepted Answer

A tax-free distribution to the executive upon retirement

Answer

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.

Question 5

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

Accepted Answer

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

Answer

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.

CEBS - Certified Employee Benefits Specialist Practice Test

CEBS - Certified Employee Benefits Specialist Practice Test

CEBS Executive Compensation & Nonqualified Plans 1