Establishing a deferred comp. plan for executives

[Guest mmorris]

At what level of the organization (VP, CEO, etc.) can executives typically participate in an executive deferred compensation program? Up to what % of salary? What vehicle are deferred funds typically invested in? (We're establishing a program in our company - Thanks for your help!)

[Guest EAKarno]

Nonqualified plans need to be restricted to "a select group of management or highly compensated employees." Although the definition is not certain, the IRS and the DOL have made it clear that the Section 414q definition in the Code (over $85,000/yr) is not the answer. Previously, the conventional wisdom was that the group needed to be limited to perhaps the top 5%. However, a recent case out of the 2nd Circuit Court of Appeals found a 15% level to be acceptable. The basic rule that the DOL seems to accept is that the participants should be limited to those, who by their position or level of compensation, hav sufficient leverage to negotiate their own compensation package.

As for the maximum percentage that can be deferred, theoretically 100% would be ok, however, you would have problems collecting FICA and taking care of any other benefits that involve salary reductions.

As for funding, mutual funds can be used, however, the tax and accounting effect can cause asset/liability mismatches. For that reason many employers use corporate owned life insurance which has no tax on the investment buildup and offers better financial accounting treatment, however, because of the cost of paying for the insurance coverage the short term performance may lag that of the mutual funds. Other assets than can be used would be corporate debt instruments or government bonds, however, these offer rather unattractive returns on investment. Some companies with a very high internal rate of return prefer not to fund at all. The one thing you do not want to use are annuities, the tax treatment of which will destroy the whole purpose of the plan.

If you have any questions or need any assistance feel free to give me a call or contact me via email.

Regards,

Eric A. Karno,

Balser Financial Corporation

404.504.3864

eric.karno@balser.com

If you have any questions feel free to give

[Guest mmorris]

Thanks Eric! I found your response very helpful!

[pjkoehler]

For a really interesting (and quite surprising) decision by the Second Circuit, see Demery v. Extebank Deferred Compensation Plan (B), ____ F.3d. ____ (2d. Cir. 2000) Docket No. 99-7002. The sole issue considered by the court was the make up of the "top hat" group. In this case, the court held that a NQDC plan was an ERISA "top hat" plan even though it was offered to over 15% of the employer's workforce, including employees who earned around $30,000. If you don't reside in the Second Circuit, I'd take the holding of this case as limited to its facts. But it makes for an interesting discussion of the issues.