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Deferred Compensation Plans - Supplemental Employee Retirement Plans [SERPS] In instances where an employer wants to provide supplementary compensation for key executives or employees and wishes to defer payment into the future, a non-qualified deferred compensation plan may be an option to consider. Assume for example, that an employer wants to induce a particularly valuable employee to remain with his company for a specific number of years. That employee could be motivated to do so on the promise from the company to pay him or her additional compensation upon the completion of a specific number of years of service with the company. This concept is called "golden handcuffs". In another case, the principals of a company or a partnership may want to defer compensation for themselves or for themselves and their partners, to avoid paying taxes on that compensation this year. That employer principal cannot achieve these goals through a conventional retirement plan because the laws require them to provide benefits that are uniform and that don't discriminate in favor of key executives. Accordingly, the best arrangement for them to accomplish their goals may be through a nonqualified plan. A "nonqualified," plan is simply a plan that is not subject to certain federal pension law provisions, such as nondiscrimination, eligibility, funding, and vesting. The trade off for not having to meet these special provisions in the laws is that a "nonqualified" plan does not get as many tax breaks as regular pension plans do. The main downside under a "nonqualified" plan is that an employer's business income tax deduction is also deferred; the business is not entitled to a deduction for the deferred compensation until the funds are available to the recipient, which could be years away. The following are a few of the uniquely variegated terms that describe some of the nonqualified plans available [SERPS]: Golden parachutes: A golden parachute is an agreement between companies
and their key personnel whereby the corporation agrees to pay amounts,
often in excess of their usual compensation, to these key employees if
there ever is a change in the management control of the corporation. Golden handcuffs: A golden handcuff is an agreement between companies
and their key executives under which the executives are paid supplemental
retirement benefits if they meet certain conditions. The traditional use
of such a plan is to motivate an executive or employee to remain with
the company until a certain age. Golden handcuffs are designed to encourage
long-term employment relationships. Top-hat plans: A top-hat plan is an unfunded plan maintained primarily
to provide deferred compensation to a select group of management or highly
compensated employees. Special reporting and disclosure rules apply. Rabbi trusts: A rabbi trust is a nonqualified deferred compensation arrangement
in which amounts are transferred to an irrevocable trust to be held for
the benefit of executive employees. The funds in the trust can still be
reached by creditors of the company; for example, in a bankruptcy. ALSO, PLEASE NOTE: Notwithstanding the informational descriptions outlined above, due to the complexity of these plans, it is imperative that employers discuss these employee benefit options with thier attorney or accountant to determine whether a nonqualified plan is appropriate in meeting the company's needs. NOTE: The Economic Growth and Tax Relief Reconciliation Act of 2001 [EGTRRA] has brought about sweeping changes in the rules governing retirement plans. Please consider these changes as you address issues surrounding your retirement plan decisions. For more detailed information and answers to specific questions about this new Federal legislation please visit the Federal Legislation Update section of this website or contact us directly at 847-550-0144 or e-mail us at info@gfsginc.com. Back to 401k / 403b / 457b - Pension Plans LEGAL NOTICES
Global Finanical Services Group
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