Tom Sigmund presented "Dos + Don'ts of Non-Qualified Deferred Compensation Plans" at the Ohio Society of CPA's Mega Tax Conference on December 7-8, 2015. The presentation focused on deferred compensation arrangements, what it means to be non-qualified and when it is used.

1. z
presented by Tom Sigmund
Ohio Society of CPAs Mega Tax Conference
December 7-8, 2015

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

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

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

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

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

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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

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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

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Trust/
Funding
Avoid ERISA Requirements
Minimum
Participation
Vesting
Extensive
Report +
Disclosure
Requirements
Fiduciary
Obligations

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

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

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Disability
Permissible Payment Events
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

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Explore the
workings of
these plans
+ Very flexible
+ Can be customized for different executives
+ Incentivize executive to work with an owner’s
mentality
+ Retain key employees
+ Work in tandem with ESOP
+ Work in tandem with buy-out

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Informally
fund
1. Life insurance
2. Annuity contract
3. Reserves
4. Rabbi trusts

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Consider long-
term vesting
1. Years of service
2. Performance benchmarks
3. Combination of the same

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Explore
structure to
avoid 409A
1. SARs
2. Stock options
3. Short-term deferrals
4. Death benefit only plans
5. Severance arrangements
6. Qualified retirement plans
7. Split-dollar agreements

25. z
File with the
Department
of Labor
Include specific
employment rule
Treat installment payments
as separate payments

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Have
permissible
payment events
+ Disability
+ Death
+ Change of control
+ Unforeseeable emergency
+ Fixed time
+ Separation of service

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Meet with
client to review
any + all potential
deferred compensation
arrangements to determine
compliance + take possible
corrective actions

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Defer payments of SAR or
stock options beyond
exercise
Accelerate payments
Delay payments

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Offset payments with
other arrangements
Ignore these plans in
mergers + acquisitions
Ignore run-of-
the-mill
reimbursement
arrangements

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Modify grandfathered plans
Grandfathered plan essentially means deferred
compensation that is vested as of December 31,
2004 and that is not materially modified after
October 3, 2004

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Modify stock option + SARs
+ Modification means any change in the terms of
stock rights resulting in direct or indirect
reduction in the exercise price
+ If modified, the stock right is treated as having
been granted on date of modification
+ Extension will be treated as
though there is a deferral feature
from the date of the grant

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Deal with these plans alone
+ Work with business advisor
+ Work with company board
+ Work with lawyers
+ Work with accountant
+ Work with valuation expert

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