"Non-Qualified Deferred Compensation Plans" was presented by Tom Sigmund on December 18, 2014, at the CPA Mega Tax Conference. Tom discussed the details of non-qualified deferred compensation plans, including social security taxes, informal funding and penalties.

1. z
Non-Qualified Deferred Compensation
PLANS
presented by Tom Sigmund
December 18, 2014

2. z
“undermine integrity/reputation
of legal professionals”
are we talking about?
WHAT

3. z
Deferred Compensation
Arrangement
An unsecured, unfunded promise to pay to
a select group of management or highly
compensated employees

4. z
Comes in All Shapes + Sizes
Defined
Contribution Plan
Defined
Benefit
Plan
Equity-
Based Plan
SARs
Stock Options
Phantom Stock Plans

5. z
“undermine integrity/reputation
of legal professionals”
does it mean to be
non-qualified?
WHAT

6. z
Not Subject to Rigid IRC Rules
Vesting requirements
Participation requirements
Eligibility requirements
Coverage requirements
Minimum funding

7. z
Not Granted Favorable Tax Treatment
Deduction for contribution
Tax deferral to participant until paid
Tax-free growth

8. z
“undermine integrity/reputation
of legal professionals”
do we use it + why?
WHEN

9. z
Want to compensate key employee(s) in a
manner that would be discriminatory if a
qualified plan or which exceeds the benefits
that could be provided in a qualified plan.

10. z
Incentivize Key Employees
1. Golden Handcuffs
2. Work with a long-term goal to make company more
profitable
3. Work with an owner’s mentality
4. Keep those employees happy long term

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Buyout

12. z
“undermine integrity/reputation
of legal professionals”
is the objective tax-wise +
otherwise of these plans?
WHAT

13. z
Objective
Avoid complexity of Internal Revenue Code
Custom design plan for each employee in question
Defer taxation of benefits to employee until paid
Avoid ERISA requirements

14. z
Avoid ERISA Requirements
Trust/funding
Minimum participation
Vesting
Extensive report/disclosure requirements
Fiduciary obligations

15. z
“undermine integrity/reputation
of legal professionals”
Informal
FUNDING

16. z
Use of life insurance
Rabbi trust
Creditor Claims

17. z
“undermine integrity/reputation
of legal professionals”
IRC
§409A

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Legislation
enacted in
response to
Enron debacle

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409A Requirements (if not exempt)
Timing of deferrals by employee
Designation of time and form of payment
Permissible payment events
Extension of deferral
Separation pay

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Permissible Payment Events
Disability
Death
Change of Control
Unforeseeable emergency
Separation from service
Fixed time

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Notable Exceptions
Equity compensation
Short-term deferrals
Separation pay

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PENALTIES
for Non-Compliance

23. z
“undermine integrity/reputation
of legal professionals”
Social Security
TAXES

24. z
Social Security Taxes
Subject to FICA when no longer
subject to substantial risk of
forfeiture (as opposed to when paid)
1. Taxable wage base
2. Medicare portion

25. z
Recurring
Problems +
Complexity

26. z
Structuring business-driven compensation
arrangements that have no tax motivation.
Example: Executive’s base salary would be defined and paid
at the earlier of a specified date or the Company’s closing of a
capital raise in excess of a specified dollar amount.

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Severance Arrangements
1. Non-compliance tends to occur when the severance
arrangement isn’t designed to fall within the exception of
Section 409A.
2. The most common problem is the failure to include the 6-
month delay rule and the impact of release delivery
requirements that would impermissibly allow an executive to
potentially affect the year of payment.

28. z
Restricted Stock Unit
1. Vesting when executive reaches retirement age but at the time of
grant the executive has already reached retirement age or will at a
point early enough in the award period that the restricted stock
units don’t qualify under the short-term deferral rules.
2. When Restricted Stock Unit does not meet short-term deferral
exception, failure to include the 6-month delay provision or
acceleration in the event of a change of control that doesn’t comply
with the definition found in 409A.

29. z
Due diligence reviews of target company
compensation and benefit arrangements.

30. z
In merger and acquisition, target executive wants to be
paid out under his deferred compensation agreement that
requires severance from service but the acquiring
corporation wants to retain the executive. Often the change
of control/termination rule needs to be relied on.

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Section 409 basically adds additional costs and time to
transactions that it applies to without accomplishing
much, if anything, of significance. Almost no one ends
up paying the excise tax and most transactions occur
almost exactly as before.

32. z
Modifications to the terms of stock options and
whether or not such a modification is treated as a
modification under 409A which could cause a problem
if the stock value has gone up since its grant.

33. z
Practitioners that spend large portions of their day thinking
about 409A frequently struggle to come to conclusions and
then often do not agree with each other when they do so.
Sometimes the best that can be done is to identify risks,
positions, stress points and uncertainty.

34. z
The rules for payment at a specified time or a fixed
schedule, require payment on date or dates that are
nondiscretionary and objectively determined at the time
the amount is deferred. Therefore, they cannot generally be
based on the occurrence of an event.

35. z
There has been little change in the prevalence
of non-qualified deferred compensation plans
and the popularity has been steady.

36. z
Anti-acceleration rules put limitations on
de-risking in the non-qualified deferred
compensation arena (as opposed to the
qualified plan arena).

37. z
Anti-acceleration rules put limitations on
de-risking in the non-qualified deferred
compensation arena (as opposed to the
qualified plan arena).

38. z
The requirements of 409A can
cause impediments to succession
planning during the transition period.

39. z
409A Can Impact Reimbursement
Arrangements
1. If a relocation package is available over multiple years,
the amounts available in a later year cannot depend on
what was spent, reimbursed or incurred in an earlier year.
2. The payment of reimbursements cannot depend on a
payment trigger that is not permissible under 409A (e.g.,
when the current residence is sold).
3. Acceleration or further deferral of payments must comply
with 409A unless an exception applies.

40. z
RECENT
Developments

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On February 25, 2014 the IRS issued final regulations
clarifying the meaning of “substantial risk of forfeiture”
under IRC §83. In summary, the IRS stated that “further,
Treasury and the IRS believe that these regulations
should not be modified to state that an involuntary
separation from service without cause may qualify as a
substantial risk of forfeiture under §83.”
RECENT Developments

42. z
IRS Field Attorney Advice (FAA 20134301F) on
employee bonus deductions.
If bonus plan states that the employer retains the right
to eliminate or modify the bonuses at any time prior to
payment, the all events test is not met.
RECENT Developments

43. z
U.S. Department of Treasury, Semi-Annual Regulatory
Agenda Release (5/23/14). Among items scheduled for
release are:
1. A final rule on the definition of “highly compensated employee.”
2. A final rule on further guidance on the application of §409A to
non-qualified deferred compensation plans.
3. Combining correction programs and expanding violations covered.
RECENT Developments

44. z
IRS Initiates Limited Scope Audit of Non-Qualified
Deferred Compensation Plan Compliance with §409A.
1. IRS has stated it will send information document requests to
a limited number of companies (fewer than 50) from a group
of large employers that have been previously selected for an
employment tax audits.
2. The IRS’s intent is to refine audit techniques and test
compliance in three areas.
Initial elections to defer compensation;
Subsequent elections to re-defer compensation; and
Plan distributions and compliance with §409A, including the requirement
that distributions to “specified employees” of public companies be delayed
for at least 6 months.
RECENT Developments

45. z
Proposed Legislation to tax deferred
compensation when no longer subject to a
“substantial risk of forfeiture.”
RECENT Developments

46. z
Thank You!
Tom Sigmund, Director
Kegler Brown Hill + Ritter
tsigmund@keglerbrown.com
keglerbrown.com/sigmund
614.462.5462