Executive Compensation & Equity Plans Flashcards
7 cards from real CPM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Executive Compensation & Equity Plans flashcards as text
Section 409A of the Internal Revenue Code primarily governs:
Answer: Nonqualified deferred compensation (NQDC) arrangements
Section 409A imposes strict rules on nonqualified deferred compensation plans regarding election timing, permissible distribution triggers, and prohibited acceleration of payments.
Under Section 409A, which of the following is NOT a permissible trigger for distributing nonqualified deferred compensation?
Answer: Employee's voluntary request to receive payment at any time
Section 409A restricts distributions to six specific permitted events (separation, death, disability, change in control, fixed date, and unforeseeable emergency); discretionary on-demand payments are prohibited.
The tax consequences of a Section 409A violation to the employee include:
Answer: Immediate income inclusion of the deferred amount, a 20% excise tax, and premium interest charges
A 409A violation results in immediate income inclusion, a 20% excise tax on the deferred amount, and underpayment interest computed from the original deferral year — making violations extremely costly.
For 'specified employees' of publicly traded companies, Section 409A requires a mandatory waiting period before receiving separation-triggered NQDC distributions of:
Answer: 6 months after separation
Specified employees (key executives) of publicly traded companies must wait at least 6 months after separation from service before receiving NQDC payments triggered by that separation.
Under Section 409A, an initial deferral election must generally be made:
Answer: Before the end of the taxable year preceding the year in which the services giving rise to the compensation are performed
The initial deferral election must be made before the end of the tax year preceding the year in which the services are performed, preventing deferral of compensation already earned.
A 'top-hat' plan under ERISA is a nonqualified deferred compensation plan established for:
Answer: A select group of management or highly compensated employees
Top-hat plans are exempt from most ERISA requirements (vesting, funding, fiduciary) because they cover only a select group of management or highly compensated employees who can protect their own interests.
Rabbi trusts established to informally fund nonqualified deferred compensation obligations:
Answer: Remain subject to the claims of the employer's general creditors in the event of insolvency or bankruptcy
Rabbi trust assets are reachable by the employer's general creditors in bankruptcy, meaning employees bear credit risk; the trust protects against employer discretion but not insolvency.