Table of Contents. About the Authors...iii Preface...v

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1 A Front Pages 6/29/06 2:59 PM Page vii About the Authors...iii Preface...v Chapter 1: Introduction to Nonqualified Deferred Compensation Plans...1 Overview of Nonqualified Deferred Compensation after 409A...1 In General...1 Nonqualified Plans Versus Qualified and Other Plans After Code Section 409A...2 What is Nonqualified Deferred Compensation Under 409A?...4 Why Use Nonqualified Deferred Compensation Plans?...7 Qualified Plans Versus Nonqualified Plans...7 When Qualified Plan Contributions Are Not Enough...8 The Retirement Income Gap...9 Increasingly Important Component of the Compensation & Benefit Package...15 Best Benefits Marketing Opportunity in Decades...16 The Major Changes...16 Broken Plans Under Code Section 409A & Subsequent Guidance...17 Fixing Broken Nonqualified Plans...17 Accounting Changes Have Made Equity Compensation Less Attractive and Cash Compensation More Attractive...18 Sarbanes-Oxley & SOX SEC Regulations...19 Split Dollar Life Insurance Final Regulations & 409A...20 New 457 Nonprofit Nonqualified Plan Law & Regulations...21 Voluntary Bonus Deferral Plans Are In Demand Again...22 Expensing of Equity Compensation Arrangements...22 Getting Started...23 Summary...24 Chapter 2: Basics of Nonqualified Plan Types, Their Design & Uses...29 Types of Nonqualified Deferred Compensation Under Code Section 409A...29 Plan Types After Code Section 409A...29 Designing Nonqualified Plans After 409A Choice of Plans...32 Deferral Account Balance Plans...32 Supplemental Nonaccount Balance & Account Balance Plans...33 Death Benefit Only Plans...34 Permissible Parties to Nonqualified Deferred Compensation Plans...35 In General...35 Outside Directors and Independent Contractors Under 409A...36 Nonqualified Deferred Compensation Plans Between Accrual Based Parties...37 Nonqualified Plan for Non-Governmental Not-for-Profit Organizations...38 History...38 vii

2 A Front Pages 6/29/06 2:59 PM Page viii Ineligible 457(f) Nonqualified Plans for Select Management Groups & the Highly Compensated of Nongovernmental Nonprofit Organizations...40 When is Nonqualified Deferred Compensation Appropriate?...42 In General...42 Use Opportunities...43 General Case Considerations...45 Selecting the Plan Type...46 Typical Plan Components...47 Written & Legally Binding Plan Requirement...47 Deferral Plans...48 Supplemental Plans...52 Death Benefit Only Plans...53 Split Dollar Life Insurance Plans...53 General Plan Design Parameters...54 Unfunded Versus Funded Plans...55 Vested Benefits...56 In General...56 Use of Endorsement Split Dollar Contracts as an Asset Reserve...57 Vested Benefits and ERISA...58 Vested Death Benefits...59 Nonqualified 457(f) Plans...59 Federal Credit Unions...60 Advance IRS Letter Rulings & Plan Documentation...61 Chapter 3: Creating an Asset Reserve and Illustrating Deferred Compensation Plans...65 Informal Funding of Deferred Compensation Plans...65 In General...65 The Pay-As-You-Go Approach (NO ASSET RESERVE)...66 The General Asset Reserve Sinking Fund Approach...68 The Corporate-Owned Annuity (COA) Approach...69 The Corporate-Owned Life Insurance (COLI) Approach...70 Types of Corporate Insurance Contracts...72 COLI Purchase Strategies...73 The Taxable Investments (Mutual Funds & Other Securities) Approach...74 Company Stock Approach...76 Illustrating and Explaining Nonqualified Deferred Compensation Plans...76 In General It s All About the Plan...76 Financial Information Employers Typically Want to See and Need to Know About a Plan...77 Overcoming Plan Design, Financial, & Accounting Issues and Objections...83 Other Elements of Successful Presentation...86

3 A Front Pages 6/29/06 2:59 PM Page ix Chapter 4: Federal Tax Implications of the Plan...89 Introduction...89 Overview of IRC Section 409A...91 Scope of the Law...91 Definitions A Detail Requirements...97 Prohibited Acceleration Funded Plan Limitations A Penalties and IRS Income Tax Reporting Federal Income Taxation of the Employer In General Plan Tax Consequences Taxation of Assets in the Employer s Asset Reserve Taxability of Non Life Insurance Investments as an Asset Reserve Taxability Under the Corporate Alternative Minimum Tax (AMT)..109 Federal Income Taxation of the Executive In General IRC Section 457 Eligible Plans IRC Section 457(f) Ineligible Plans Current Income Taxation Consequences Pre 409A Income Law Constructive Receipt Doctrine IRC Section 451 Substantial Limitation or Risk Economic Benefit Doctrine IRC Section 83 Transfers of Property & IRC Section 83 Substantial Risk of Forfeiture Income Taxation of Retirement Benefits Income Taxation of Death Benefits Income Taxation of Severance Benefits Federal Estate Taxation In General Death Benefit Only (DBO) Plans Federal Gift Taxation Federal Generation-Skipping Transfer Taxation State Taxation Issues State Income Taxation Upon Deferral State Income Taxation Upon Distribution Use in Partnerships or Limited Liability Companies Use in S Corporations Chapter 5: ERISA Requirements Introduction Reporting and Disclosure Requirements Participation, Vesting, and Funding Requirements Fiduciary Requirements Claims Procedures Plan Termination Insurance ix

4 A Front Pages 6/29/06 2:59 PM Page x What Is a Select Group of Management or Highly Compensated Employees? When Is a Plan Unfunded for ERISA Exemption Purposes? ERISA-Proofing Your Plan Use of a Rabbi Trust ERISA and IRC Section 409A Summary Chapter 6: Accounting for Nonqualified Deferred Compensation Plans Introduction Fundamentals of Accounting In General The Balance Sheet Income Statement Basic Accounting Mechanics Accounting for Deferred Compensation Plans Separate Accounting for Benefits & Any Plan Connected Assets Accounting for the Benefits In General Historical Accounting For Nonqualified Deferred Compensation Plans APB Opinion No.8 Accounting for the Cost of Pension Plans APB Opinion Number 12 Omnibus Opinion Statement of Financial Accounting Standards 87 Employers Accounting for Pensions Current Practice Using FAS Statement of Financial Accounting Standards 106 Employers Accounting for Postretirement Benefits Other than Pensions Statement of Financial Accounting Standards 109 Accounting for Income Taxes Nonqualified Defined Contribution Arrangement Example Nonqualified Defined Benefit Arrangement Example Preretirement Death Benefits and Other Adjustments In Plans FASB Plans to Reconsider Postretirement Benefits Accounting Beginning Accounting for Popular General Asset Reserve Choices In General Mutual Funds Corporate Stock Treasury Stock Corporate Owned Life Insurance In General Historical Cash Surrender Value Method The Ratable Charge Method The Accrual Basis Method The Economic Benefit Method x

5 A Front Pages 6/29/06 2:59 PM Page xi Current Practice Cash Surrender Values and Premiums Death Benefits Policy Loans Income Tax Accounting Impact of Various Assets Held as a General Reserve Hedge Income Tax Accounting Prohibited Chapter 7: Securing the Plan s Benefits Introduction COLI and Other Assets Annuities Rabbi Trusts In General History Rabbi Trust Design Requirements in Light of Revenue Procedures 92-64, 92-65, and Advantages and Disadvantages Impact of 409A on Rabbi Trusts Secular Trusts In General Employee-Grantor Secular Trusts Employer-Grantor Secular Trusts Secular Trust Summary Rabbi/Secular Trusts and Non-Sectarian Trusts Surety Bonds and Indemnity Insurance Third-Party Guarantees Plan Document Provisions Conclusion Chapter 8: Miscellaneous Plan Considerations Reasonable Compensation Considerations Federal Income Tax Concerns Golden Parachute Rules State Corporate Waste Law Concerns Social Security and Federal Unemployment Tax Considerations Background Pre-1983 Amendments Social Security Amendments of Proposed & Final Regulations What Plans are Covered Under FICA/FUTA? Special Timing Rule and Nonduplication Rule Account Balance Versus Nonaccount Balance Plans For FICA Purposes Death Benefits Are Social Security Benefits Reduced? The Work Test & Earned Income Rules Independent Contractors xi

6 A Front Pages 6/29/06 2:59 PM Page xii Summary General & 409A Withholding & Reporting for Income Tax Purposes In General Form W-2 Requirements After 409A SEC Considerations Introduction Proxy Disclosure Requirements Background History of Pre-2007 Proxy Disclosure Pre-1993 Proxy Disclosure Disclosure Requirements Defined Benefit Plans Pre Proposed Proxy Disclosure Regulations Nonqualified Plan Disclosure Issues Under the SEC s 2006 Amendments What Should a Narrative Nonqualified Deferred Compensation Plan Disclosure Look Like? Plan Proxy Descriptions After the Dependahl Case Sample Proxy Statement Description SEC Form 8-K Accelerated Disclosure Requirements For Executive & Director Compensation Securities Registration Requirements & Issues NYSE & NASDAQ Prior Shareholder Approval Requirements In General Controlling Shareholder Situations Constructive Dividend & Deductibility Issues Nonqualified Deferred Compensation Plans & Bankruptcy Nonqualified Plan Benefits & Divorce Nonqualified Plan Impact on Existing Qualified Plans? Nonqualified Plans in Global Companies (U.S. or Foreign) Business Exchange Provisions on COLI Contracts Financial Institutions and Nonqualified Deferred Compensation Plans & Bank-Owned Life Insurance (BOLI) Chapter 9: Specimen Documents Designing & Documenting a Nonqualified Deferred Compensation Plan Introduction General Design Parameters Common Nonqualified Plan Design Traps General Guidelines & Requirements of a Nonqualified 451 Deferred Compensation Plan Document In Light of 409A Summary Sample Documents Introduction Index xii