In our second to last week of lectures, we discussed deferred compensation, non-qualified plans, and fringe benefits. The distinction between non-qualified plans and qualified plans is ERISA does not cover non-qualified plans. Typically, non-qualified plans are established by employers so that they may provide benefits to select groups of employees and to avoid discrimination. Also, non-qualified plans allow employers to distribute more funds to key employees because of the lack of harsh discrimination testing such as with qualified plans.
Deferred compensation arrangements lack the tax advantages offered by qualified plans. They usually involve deferral of income by executives. There is no mismatch of tax deductions and taxable income. Generally, employees must have a substantial risk of forfeiture and must not have constructive receipt of funds. Deferred compensation arrangements are useful to increase the executive's wage replacement ratio, to defer the executive's compensation, or in lieu of qualified plans. Constructive receipt occurs when funds are set aside for the taxpayer, credited to his account, or made available so that he may draw upon them at any time. This established when income is included in a taxpayer's taxable income. Examples of constructive receipt include mature interest coupon payments that have not been cashed, dividends on corporate stock subject to demand of the shareholder, leaving a check in the mailbox, etc. Substantial risk of forfeiture is another concept that established when income is included in a taxpayer's taxable income. This occurs when rights in transferred property are conditioned, directly or indirectly, upon some future occurrence. When substantial forfeiture exists, no income tax consequences are incurred. If there is no substantial risk of forfeiture, income must be currently recognized as taxable.
Multiple deferred compensation plans exist. Non-qualified deferred compensation plans are contractual agreements between an employer and executive where the employer promises to pay the executive a predetermined amount sometime in the near future. Next, phantom stock plans are NQDC plans. The employer gives fictional shares of stock to key executives. At a later time, the stock is valued and the executive will receive the increase in value as compensation. With this method, no actual stock is issued. Executives have taxable income and employers have a deduction at the time payment is made to the executive. Supplemental Executive Retirement Plans (SERPs) are also NQDC plans known as top-hat plans and excessive-benefit plans. These provide additional benefits to an executive during retirement. Salary reduction plans allow executives to defer the receipt of his/her salary to the future. They must elect to defer compensation before earning the salary. 401(k) WRAP Plans allow executives who maximize the allowable 401k deferral ($17,500 in 2013) to defer additional salary into a NQDC plan. Substantial risk of forfeiture exists in this plan. Incentive Stock Options (ISOs) are statutory stock options. They tie an employee benefit to the stock price of the company and many provide special taxation. These may only be granted to employees. The aggregate FMV of ISO grants must be less than $100,000 per year per executive. For ISO special tax treatment, an individual must hold stock two years from the grant date, or one year from the exercise date. Stock Appreciation Rights (SARs) grant the holder cash in amount equal to the excess of the FMV of the stock exceeding the exercise price. More NQDC plans exist as well.
Fringe benefits are a method of employee compensation. A benefit other than customary taxable wages is provided to an employee. For example, fringe benefits include meals, lodging, employee discounts, qualifying moving expenses reimbursement. Fringe benefits are used to allocate further benefits to employees on top of their salary and to create tax deductions for employers.
Deferred compensation arrangements lack the tax advantages offered by qualified plans. They usually involve deferral of income by executives. There is no mismatch of tax deductions and taxable income. Generally, employees must have a substantial risk of forfeiture and must not have constructive receipt of funds. Deferred compensation arrangements are useful to increase the executive's wage replacement ratio, to defer the executive's compensation, or in lieu of qualified plans. Constructive receipt occurs when funds are set aside for the taxpayer, credited to his account, or made available so that he may draw upon them at any time. This established when income is included in a taxpayer's taxable income. Examples of constructive receipt include mature interest coupon payments that have not been cashed, dividends on corporate stock subject to demand of the shareholder, leaving a check in the mailbox, etc. Substantial risk of forfeiture is another concept that established when income is included in a taxpayer's taxable income. This occurs when rights in transferred property are conditioned, directly or indirectly, upon some future occurrence. When substantial forfeiture exists, no income tax consequences are incurred. If there is no substantial risk of forfeiture, income must be currently recognized as taxable.
Multiple deferred compensation plans exist. Non-qualified deferred compensation plans are contractual agreements between an employer and executive where the employer promises to pay the executive a predetermined amount sometime in the near future. Next, phantom stock plans are NQDC plans. The employer gives fictional shares of stock to key executives. At a later time, the stock is valued and the executive will receive the increase in value as compensation. With this method, no actual stock is issued. Executives have taxable income and employers have a deduction at the time payment is made to the executive. Supplemental Executive Retirement Plans (SERPs) are also NQDC plans known as top-hat plans and excessive-benefit plans. These provide additional benefits to an executive during retirement. Salary reduction plans allow executives to defer the receipt of his/her salary to the future. They must elect to defer compensation before earning the salary. 401(k) WRAP Plans allow executives who maximize the allowable 401k deferral ($17,500 in 2013) to defer additional salary into a NQDC plan. Substantial risk of forfeiture exists in this plan. Incentive Stock Options (ISOs) are statutory stock options. They tie an employee benefit to the stock price of the company and many provide special taxation. These may only be granted to employees. The aggregate FMV of ISO grants must be less than $100,000 per year per executive. For ISO special tax treatment, an individual must hold stock two years from the grant date, or one year from the exercise date. Stock Appreciation Rights (SARs) grant the holder cash in amount equal to the excess of the FMV of the stock exceeding the exercise price. More NQDC plans exist as well.
Fringe benefits are a method of employee compensation. A benefit other than customary taxable wages is provided to an employee. For example, fringe benefits include meals, lodging, employee discounts, qualifying moving expenses reimbursement. Fringe benefits are used to allocate further benefits to employees on top of their salary and to create tax deductions for employers.