In the United States, the question of whether any compensation plan that qualifies or does not meet its main requirements is a tax problem under the Internal Revenue Code (IRC). Every business prefers to cut its expenses from its earnings, which will reduce taxable income. The deductible ("eligible") fee has a satisfactory test that is required by IRC. Fees that do not meet the test ("not eligible") can not be deducted; Even though the business has incurred costs, that amount of expenditure remains as part of taxable income. In most situations, any business will try to meet the requirements so that its expenses are a deductible business expense.
The non-qualifiable deferred compensation plan only cancels partial payments from employee compensation into the future. The amount is retained (deferred) when the employee works for the company, and is paid to the employee when he separates from service, becomes disabled, dies, etc. As discussed later, one of the keys in designing an ineligible compensation plan is to ensure that employees will not be required to pay income taxes on such deferred amounts until that amount is actually paid to employees.
Video Nonqualified deferred compensation
Basics
In describing "an ineligible deferred compensation plan", we can consider each word.
- Unqualified: "ineligible" plan does not meet all technical requirements imposed on "eligible packages" (such as retirement and profit sharing packages) under the IRC or the Employee Income Security Act ERISA). However, they are required to meet IRC requirements Ã,§ 409A.
- Suspended: employee compensation receipt is postponed to a future date (such as the normal retirement age).
- Compensation: employees may postpone regular salaries, bonuses, or other types of compensation. Extremely high employees in the corporate hierarchy may receive additional compensation (or additional) provided by the company to fund the arrangements.
- Plan: an ineligible compensation plan that can not be eligible may be assigned to one individual (for example, an employee agreement), or may be established for a large number of individuals selected in the complete company policy (eg, a "plan" for all employees high paid companies). Unacceptable deferred compensation arrangements may also be established for independent contractors, including directors.
Maps Nonqualified deferred compensation
Package type
There are two common types of unfunded deferred compensation packages:
- Elective suspension design
- Under the elective suspension plan, employee chooses to defer part of the compensation, which he/she will receive at this time. The election is contained in a written agreement that determines the amount of salary, bonus, commission or other suspension as well as time and means of payment, such as a pension.
- Additional benefits package
- Under an additional benefit plan, the employer establishes a legally binding agreement to pay "additional" compensation (compensation in addition to regular salary and bonuses), usually at retirement. This plan is often called the Executive Supplementary Pension Plan (SERP). SERPs are often designed as defined benefit pension plans, either as stand-alone plans or paired with eligible pension plans.
Flexible benefit structure
Deferred compensation plans offer flexibility for employers and employees.
The amount deferred is credited to the book account
Unfunded deferred compensation packages offer a highly flexible benefit structure compared to eligible pension plans, even after the introduction of the IRC Internal Revenue Code Ã,§409A (discussed below).
Account-based plan: Elective suspension is credited to the account in the name of the participant along with the company's contribution (such as the appropriate contribution). Earnings may be credited to the plan at interest at a fixed rate or flexible rate, or treated as if the deferred amount is invested in the specific investment designated by the employee.
Non-account plans (defined benefit plan): The amount of benefits can also be a certain dollar amount paid each year after retirement or termination. The payments continue as specified in the plan, usually during the lifetime of the employee or the life of the employee and the employee's spouse.
Suspension timeout
In general, the selection of suspension should be made with the employer before the employee has a "legally binding" right to compensation.
Elections are submitted before the calendar year's salary, commissions and some bonuses are earned.
Next election for certain contingent compensation type ("performance-based" salary earned for 12 months or more, foreclosed rights, etc.) Sign-on, retention, bonus spot, project bonus, severance at the time of compensation negotiated.
Unfunded Packages
With an unfunded deferred compensation plan, the employer may purchase insurance to help meet its obligations as planned, but an unqualified compensation plan that is not eligible may not bind the amount of direct benefit to the amount paid under a life insurance policy. Note that employees may only have the rights of unsecured public creditors.
Loss of benefits
Some general provisions relating to the seizure of benefits in an unfunded deferred compensation program include:
- Termination of employment before a certain vesting date, if the plan contains a vesting term.
- If the employee stops before reaching the normal retirement age, death, or disability.
- If the employee stops and enters the competition with the employer.
- If the employee is terminated for "cause."
Forfeiture provisions will usually only be included if the deferred amount is an additional allowance provided by the employer; usually the employee will not voluntarily postpone the current compensation if there is a risk that he or she will lose the amount (however, as discussed below, a suspension plan for a tax-exempt organization should often include foreclosure provisions).
Consequences of income tax for employees
If the plan is properly designed, the compensation will not be included in the employee's taxable income until paid under the terms of the plan. Four rules should be considered - the doctrine of constructive acceptance, the doctrine of economic benefits, IRC Ã,§83, and IRC Ã,§409A.
State income taxes, as well as labor taxes (FICA and FUTA), may differ in their time from federal income taxes.
The constructive acceptance doctrine does not require immediate taxing
Although the individual (as a taxpayer) typically includes the amount in the taxable income only when the actual amount is received, under "constructive doctrine of acceptance", the individual is taxed on the amount when it is available to him or she can use it at any time. For example, if a person receives a check for services performed in 2008, he can not easily hold the check and then disburse it in 2009 and suspend taxes on that amount from 2008 to 2009. The prevailing Treasury Rule states that the amount is not received constructively if "the taxpayer's control over his acceptance is subject to substantial restrictions or restrictions". Whether a taxpayer has received a constructive amount depends on the facts and circumstances of the particular case. The constructive acceptance doctrine does not require immediate taxation when the deferred compensation arrangements that do not meet the requirements are properly structured.
In an unqualified deferred compensation arrangement, the employee does not receive current benefits. Employee only unsecured creditors.
The benefits are included in taxable income when paid or provided, whichever is earlier.
The doctrine of economic benefits does not require immediate leasing
Under the "economic benefits" of the doctrine, an employee will be taxed on certain rights if the employee enjoys the economic benefits of those rights. Under this doctrine, benefits are included in gross revenues when unconditional and irrevocable assets are transferred into the funds for the sole benefit of employees and employees having an irrevocable interest. In Minor v. United States of America, 772 F.2d 1472 (9th Cir 1985), the court stated that "the doctrine of economic benefits only applies if the promise of the company is capable of valuation", and "the current economic benefits are able to assessments in which the employer contributes to the employee deferred compensation plan (i) is unacceptable, (ii) fully granted to employees, and (iii) is secured against the employer's lender by a trust arrangement ". Because employee rights will not be "guaranteed against the employer's creditors," the doctrine of economic benefits should not trigger an immediate taxation of the NQDC plan.
IRC Ã,§83 does not require immediate taxation
Section 83 does not require immediate taxation but is included in income, the value of "property" is transferred to an employee or independent contractor in return for services rendered, when the property becomes transferable or no longer subject to large foreclosure risks, whichever occurs earlier.. For the purposes of Ã, § 83, unfunded and unsecured promises to pay money or property in the future instead of "property". Thus, as long as the employer's pledge under the plan is "unfunded and unsafe", Section 83 shall not apply and shall not cause taxation before the benefit is paid. Benefits under an ineligible compensation plan are considered "unfunded" as long as the employee has no rights to certain assets of the company, the deferred amount is subject to the employer's general creditor's claims, and the employee has no power to assign his/her rights. The benefits are "unsecured" as long as the employee is considered only as a general corporate creditor.
The new IRC Ã,§409A does not require immediate taxation
Plans that are documented and managed in accordance with the requirements under IRC Ã,§409A will not cause immediate tax deferral. Although the final rule under IRC Ã,§409A length, the basic components of the IRC plan Ã,§409A-compliant are:
- Written plan document
- A written suspension agreement that specifies a deferred amount, and the time or event when the payment will be made
- Timely implementation and acceptance by the supervisor of the suspension agreement under applicable voting time rules
- Payments are in accordance with the objective terms and conditions of the plan and payment selection
The state tax laws may or may not require immediate taxation
State tax laws generally follow federal law on the timing of income income, but may also deviate from federal law.
Futa FICA taxes and do not require immediate taxation - but there is a different time
The amount is subject to the Federal Insurance Contributions Act (FICA) tax and the later Federal Tax Act Unemployment (FUTA) tax (i) when the service is provided or (ii) when the compensation is no longer subject to substantial risk of loss.
Often, employees already have income on a wage basis ($ 127,200 in 2017) for purposes of the Old Age, Survivors, Disability Insurance (OASDI) section of the FICA tax, and will not owe the tax OASDI portion. However, deferred compensation will remain subject to the hospital's insurance part of the FICA tax (referred to as "HI", or "Medicare Tax") as the current hospital wage base is unlimited. The employee's share of the Medicare tax is 1.45% of wages (and an additional 0.9% for the high-income).
Tax consequences for employer
The employer can not claim a deduction until the benefit is taxed to the employee.
ERISA considerations
Unfunded plans are excluded from most ERISA provisions as long as it is a "Top Hat" plan.
Unsupported Packages
The Top Hat plan is a non-funded plan managed by the company to provide deferred compensation to a select group of management or highly compensated employees. If coverage goes beyond this group then the plan is not a Top Hat plan.
A plan with an insurance contract in which premiums paid by an employer is deemed unfunded.
In Miller v. Heller, 915 F.Supp. 651 (S.D.N.Y. 1996), the court ruled that the deferred compensation plan was not funded even though the employer would pay the benefit of the amount received under a life insurance policy with a split-dollar plan.
The Department of Labor (DOL) Advisory Opinion 81-11A states that a deferred compensation plan financed internally with life insurance will generally be treated as unfunded if the following criteria are met:
- insurance results are only paid to the employer, who is a named beneficiary;
- the employer owns all property rights under its policies and policies subject to the claims of the employer's creditor;
- neither the plan nor the participants or recipients have any favorable claims against any policy or ownership of the benefits in the policy;
- there are no statements made to any participant or heir that the policy will be used exclusively to provide plan or security benefits for benefit payments;
- the benefits of the plan are not restricted or regulated in any way by the amount of insurance proceeds received by the employer; and
- employee contributions are not required or permitted.
Belka v. Rowe Furniture Corp.
571 F. Supp. 1249 (D. Md. 1983), found that between 1.6% and 4.6% of employees were covered by the plan and thus were the "top hat" group. In Duggan v. Hobbs, 99 F.3d 307 (9th Cir 1996), the court concluded that the plan includes one of twenty-three eligible employees as a "top hat" plan.
However, there are no rules describing what constitutes a top hat group. Some DOL advisers have addressed this issue. Letter 85-37A found that the plan is not a top hat plan even though only 50 of the highly compensated employees of the 750 employees covered by the plan. In power, the DOL found that various salaries and positions were covered by the plan and thus concluded that it was not a top hat plan.
A plan that includes an excessively large percentage of the employer's workforce will not benefit the "select group".
Important Developments in Demery v. The Extebank Compensation Plan (B), 216 F.3d 283 (2d Cir. 2000), Second Circuit concludes that the plan can still be qualified as a "top hat" plan even though (i) more than 15% of employees are eligible for participate, and (ii) two or three of the participants have neither high compensation nor management employees. Thus, while the old rule is 5% (based on Belka); Extebank seems to allow up to 15% eligibility.
Second Circuit specifies that the term "primarily" applies to benefits and participants. A small number of participants who do not meet the Top Hat definition will not contaminate the plan.
The Court considered the qualitative factors in determining the Top Hat Group:
- The ability to influence the plan.
- Quality benefits plan.
- Additional to existing plans.
- The purpose of the plan.
The court considered quantitative factors:
- Counting Choose Group Fraction - eligible amount divided by workforce. Extebank found 15.34% was "... near the upper limit."
- But see how the Second Circuit in Gallione v. Flaherty 70 F. 3d 724 (1995) increases group size but reduces the percentage by utilizing large labor.
Other Cases : Gallione v. Flaherty, 70 F.3d 724. The court refers to the number of members in the union when considering the plan established for union management.
There appears to be no adoption by the DOL definition of "highly compensated employees" found in IRC Ã, § 414 (q).
Advisory Opinion DOL 90-14A. However, DOL has shown that the "top hat" group consists of people who have the ability to influence or substantially affect the design and operation of a deferred compensation plan. DOL Advisory Opinion 90-14A (May 8, 1990).
No DOL Rules . Top Hat rules are apparently not a priority with DOL. DOL has announced that it is stopping efforts to develop regulations. The announcement does not indicate whether the regulatory project has been permanently withdrawn.
ERISA exceptions for the Top Hat package
Top Hat plans are exempt from the following ERISA provisions:
- Participation - ERISA Section 201 (2).
- Vesting - ERISA Section 201 (2).
- Benefit Accrual - ERISA Section 201 (2).
- Minimum Funding - Section ERISA 301 (a) (3).
- Fiduciary Requirements and Obligations - ERISA Section 401 (a) (1).
ERISA requirements applicable to Top Hat package
Top Hat packages must comply with the following ERISA requirements:
- Reporting and disclosure. ERISA Section 101. This is fulfilled by filling in with a DOL statement that includes (i) the name, address, identification number of the employer's employer, (ii) a statement that the plan is retained primarily for the purpose of providing deferred compensation to a selected group of management or compensated employees high, and (iii) the number of plans and number of employees in each plan. Employers may be required to provide documents to DOL if requested.
- Claim procedure under ERISA Section 503. "In addition, although the question remains unclear, the plan may be subject to the requirements of providing the claim procedure."
Unsupported benefits package
An unfunded benefit plan is defined as a plan solely to provide benefits to certain employees and solely to provide benefits that exceed the limits under IRC Ã, § 415.
Plans created by employees
Note also that in certain situations, plans made by employees should avoid ERISA.
References
Source of the article : Wikipedia
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