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2. NONQUALIFIED PLANS FOR HIGHLY PAID AND EXECUTIVE EMPLOYEES
Chapter 1
NONQUALIFIED PLANS FOR HIGHLY PAID AND EXECUTIVE EMPLOYEES
McGraw-Hill/Irwin
Copyright © The McGraw-Hill Companies, Inc. All rights reserved.
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3. LEARNING OBJECTIVES A variety of nonqualified retirement plans
Characteristics of executive benefits
Various funding mechanisms for nonqualified retirement plans and tax obligations
Stock option plans
Reporting requirements for nonqualified plans
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4. MAIN REASONS FOR NQDC
Those employees earn substantially more than the IRS limits for the maximum annual benefit for qualified defined benefit plans
Executive retirement programs are nonqualified plans because they invariably fail to meet ERISA’s coverage requirements
Executive retirement plans violate nondiscrimination rules
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5. NQDC OBJECTIVES
RESTORATION
SUPPLEMENTAL RETIREMENT BENEFITS
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6. SERPs Generate higher retirement benefits in two ways
Nonexecutive employees earn an annual retirement benefit equal to 60 percent of the highest average annual salary for a consecutive three-year period
Executives receive a substantially higher percentage of the restored annual benefit.
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7. APPLICABLE ERISA TITLE I PARTS
Reporting and disclosure
Fiduciary responsibility
Administration and enforcement
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8. FACTORS FOR FUNDING NQDC
Competitive pressures
Corporate cultures that materially recognize the value of executives
Liability management
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9. FACTORS FOR NOT FUNDING NQDC
Opportunity Cost
Shareholder expectations
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10. TYPES OF NONQUALIFIED PLANS
Excess Benefit Plans
Supplemental Executive Retirement Plans
Top Hat Plans
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11. SERP ROLE
Use of SERPs as a tool in executive-level succession planning
Rewarding substantially higher retirement benefits
Compensating for short-term employment or older new hires
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12. TOP HAT ERISA TITLE I EXEMPTIONS
Minimum standards for participation and vesting
Funding
Fiduciary responsibilities
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13. FUNDING MECHANISMS General asset approach (unfunded)
Corporate-owned life insurance (unfunded)
Split-dollar life insurance (unfunded or funded)
Rabbi trusts (unfunded)
Secular trusts (funded)
Employee-owned annuities (funded)
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14. TYPES OF STOCK OPTION PLANS
Incentive stock options
Nonstatutory stock options
Restricted stocks
Phantom stock options
Discount stock options
Stock appreciation rights
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15. INCENTIVE STOCK OPTIONS
Entitle executives to purchase their company’s stock in the future at a predetermined price
Usually, the predetermined price equals the stock price at the time an executive receives the stock option
Executives generally exercise these stock options after the price has increased dramatically within a designated period following the stock grant
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16. NONSTATUTORY STOCK OPTIONS
Awarded by companies to executives at discounted prices
Do not qualify for favorable tax treatment
Executives pay income taxes on the difference between the discounted price and the stock’s fair market value when they receive stock options with readily ascertainable fair market value
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17. RESTRICTED STOCKS
Boards of directors award restricted stock to executives at considerable discounts
Executives do not have any ownership control over the disposition of the stock for a predetermined period, often 5 to 10 years
Executives must sell the stock back to the company for exactly the same discounted price they paid at the time of purchase if they terminate their employment before the end of the designated restriction period
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18. STOCK APPRECIATION RIGHTS
Provide income to executives at the end of a designated period, much as with restricted stock options
Executives never have to exercise their stock rights to receive income
The company simply awards payment to executives based on the difference in stock price between the time the company granted the stock rights at fair market value to the end of the designated period, permitting the executives to keep the stock.
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19. REPORTING REQUIREMENTS
Agencies:
US Department of Labor
Internal Revenue Service
Securities and Exchange Commission
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20. SARBANES-OXLEY ACT
The Act mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud in response to corporate accounting scandals in Enron, Tyco and other large U.S. corporations.
The Act established Public Company Accounting Oversight Board (PCAOB) to oversee the activities of the auditing profession.
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