CPM Executive Compensation & Equity Plans 3

Question 1

Section 409A of the Internal Revenue Code primarily governs:

Accepted Answer

Nonqualified deferred compensation (NQDC) arrangements

Answer

Tax-qualified retirement plans such as 401(k) and pension plans

Answer

Incentive stock options and employee stock purchase plans

Answer

Cafeteria plans and flexible spending accounts under Section 125

Question 2

Under Section 409A, which of the following is NOT a permissible trigger for distributing nonqualified deferred compensation?

Accepted Answer

Employee's voluntary request to receive payment at any time

Answer

Separation from service

Answer

Death or disability of the participant

Answer

A change in control of the corporation

Question 3

The tax consequences of a Section 409A violation to the employee include:

Accepted Answer

Immediate income inclusion of the deferred amount, a 20% excise tax, and premium interest charges

Answer

A 10% early withdrawal penalty similar to qualified plan rules

Answer

Plan disqualification affecting all participants going forward

Answer

A 25% excise tax with no income inclusion until actual payment

Question 4

For 'specified employees' of publicly traded companies, Section 409A requires a mandatory waiting period before receiving separation-triggered NQDC distributions of:

Accepted Answer

6 months after separation

Answer

30 days after separation

Answer

60 days after separation

Answer

12 months after separation

Question 5

Under Section 409A, an initial deferral election must generally be made:

Accepted Answer

Before the end of the taxable year preceding the year in which the services giving rise to the compensation are performed

Answer

At any time during the calendar year the compensation is earned

Answer

Within 30 days after the employer makes the compensation offer

Answer

Within 90 days after the start of a new plan year

Question 6

A 'top-hat' plan under ERISA is a nonqualified deferred compensation plan established for:

Accepted Answer

A select group of management or highly compensated employees

Answer

All employees who complete one year of service regardless of compensation

Answer

Employees in the highest federal income tax bracket regardless of job title

Answer

Any employee who voluntarily elects to participate in deferred compensation

Question 7

Rabbi trusts established to informally fund nonqualified deferred compensation obligations:

Accepted Answer

Remain subject to the claims of the employer's general creditors in the event of insolvency or bankruptcy

Answer

Fully protect deferred compensation assets from the company's creditors under all circumstances

Answer

Function the same as qualified plan trusts and provide equivalent tax benefits

Answer

Allow participants to avoid Section 409A distribution restrictions