General Manager Hiring: Key Tax Points for Structuring Compensation

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1 General Manager Hiring: Key Tax Points for Structuring Compensation APTA Legal Affairs Conference, February 21, 2016 Daniel Lacomis, Esq. Berenbaum Weinshienk PC

2 Basic Framework for Manager Compensation Understand the organization s current retirement and health benefit offerings, and be prepared to specify potential benefits What are the maximum accrual/deferral amounts available? What will the Manager be able to accrue over the course of his or her tenure? Assess the need for supplemental/excess compensation arrangements Organization retention goals, contract terms and renewals Manager retirement goals and timing, current retirement benefits Consider severance, death and disability contingencies Preserve organizational continuity and culture 2

3 Tax Constraints for Retirement Benefits Traditional defined benefit plans The annual benefit payable from a pension plan is limited by Code Section 415(b) for 2016, the limit is $210,000 The annual compensation limit under Code Section 401(a)(17) for 2016, the limit is $265,000 Defined contribution plans The annual accrual with respect to all defined contribution plans is limited by Code Section 415(c) for 2016 the limit is $53,000 The elective deferral (contribution) limit for employees who participate in 401(k) and/or 403(b) plans is $18,000 Separately, a governmental employee may make elective deferrals of $18,000 to a 457(b) plan. The catch up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), and 457 plans is $6,000 Deferred compensation Code Section 457(f) governmental deferred compensation requirements Code Section 409A applies to all deferred compensation arrangements Pitfalls of severance and post retirement obligations characterized as deferred compensation 3

4 Crafting Simplest Approach to Manager Compensation Defined benefits fulfilling the promised level of benefits promised under the organization s pension plan Advisable to evaluate what the Manager will be able to accrue during tenure: look at benefit formula, vesting and portability Qualified Governmental Excess Benefit Plan Code Section 415(m) Plan benefits aren t considered in determining whether 415 limits are met (IRC Section 415(m)(3)). Administered much like a deferred compensation plan under 457(f) Separate defined benefit pension plan for Manager Code Section 410(b) coverage requirements n/a to governmental plans Insurance or annuity contract plans Code Section 411(e) provide simple funding mechanism 4

5 Crafting Simplest Approach to Manager Compensation (cont) Defined contribution plans Is the full Section 415(c) limit (2016 at $53,000) being utilized Governmental plans may provide separate allocation levels for Manager Aggregation of plan limits: Maximum deferral limitations DB and DC mix 401(a)/403(b) and 457(b) mix Deferred Compensation Arrangements when DB/DC plans are not adequate or when other factors favor arrangement Requires a written plan, separate from employment agreement Risk of noncompliance or undesirable outcomes 5

6 Deferred Compensation Approaches Code Sections 457(f) and 409A two layers of tax complexity IRS to issue long awaited 457(f) regulations any year now IRS Notice IRS intention to apply Code Section 409A rules Simple option full vesting in specified benefit after fulfillment of Employment Agreement E.g. if Manager completes five year employment agreement vests and is paid $250,000; voluntary termination by Manager results in forfeiture More complex option rolling vesting provides flexibility E.g., Manager is to vest in 1/5 of target benefit each year, but may defer each for additional 5 years, leading to cascading vesting of benefits which accommodates contract extensions and may be enhanced 6

7 Risks with Manager Compensation Pieces Governmental excess benefit plan Risk of qualification of defined benefit plan if not segregated Risk of funding shortfalls or market losses on segregated trust funds Deferred compensation plans 457(f) and 409A risk of noncompliance potential inclusion of income for Manager in earlier year, plus 20% penalty Severance provisions can trigger the same penalties must be a bona fide severance arrangement under Code Section 457(f) and incorporate good reason termination definition from Code Section 409A, etc. Disability provisions can also trigger penalties if Code Section 409A definition is not used 7

8 Health and Welfare Benefits Promises to provide health coverage post retirement can trigger deferred compensation penalties and Affordable Care Act issues Affordable Care Act contains nondiscrimination provisions which will preclude separate health policies for executives Not effective yet, may never be based on problems with large corporations Will apply to governmental employers 8

9 General Manager Hiring: Key Tax Points for Structuring Compensation APTA Legal Affairs Conference, February 21, 2016 Daniel Lacomis, Esq. Berenbaum Weinshienk PC