Other Plan Types
Welcome
Notes:
Copyright© 2021. PSCA. All rights reserved.
Main Menu
Notes:
This module is divided into four sections:
In the first section we will discuss, Other Defined Contribution Plan Designs, where you will learn to recognize the design elements of money purchase and target benefit defined contribution plans.
In the second section we will discuss, Nonqualified Deferred Compensation Plans, where you will learn the differences between each plan and how it will meet your employee’s needs.
The third section will cover, Employer Stock Plans, where you will learn to identify and explain the differences between stock bonus, employer stock ownership plans also known as ESOPs, and Employer Stock Purchase Plans.
Lastly, we will cover, Health Savings Accounts, where you will learn about the triple tax
benefit provided by HSAs and be able to explain why they are becoming an important retirement savings and planning tool.
Want to jump to a specific section? Click it from this menu. To go through this module in order, just click next to get started.
Section 2: Nonqualified Deferred Compensation Plans
Nonqualified Deferred Compensation Plans
Copyright© 2021. PSCA. All rights reserved.
nonqualified deferred compensation (NQDC) plans to provide benefits to more highly paid, senior executives and independent contractors.
What is an NQDC Plan?
Notes:
In its most basic form, a Nonqualified Deferred Compensation (NQDC) plan is an agreement between an employer and an eligible employee to pay compensation in the future for current services. Unlike qualified plans, NQDC plans are designed to be exempt from ERISA's coverage and participation rules. This allows them to be limited to a select group of employees. In fact, they are often called "top hat" plans.
The primary reason employers offer Nonqualified deferred compensation plans, is
because unlike qualified plans, there are no statutory limits on how much can be
deferred. This is particularly attractive to highly paid employees who want to defer the taxation of compensation or bonuses.
Other NQDC Plan Differences
Copyright© 2021. PSCA. All rights reserved.
Finally, NQDC plans are general liabilities that must be part of the balance sheet. Since they remain corporate assets, they remain subject to the claims of creditors.
We'll discuss why later in this section.
Types of NQDC Plans
Notes:
There are five common nonqualified deferred compensation plan designs.
They are:
Salary Reduction Plans, 401(k) mirror plans, Supplemental Executive Retirement Plans
(SERPs), Benefit Restoration Plans and Long-Term Incentive Plans.
Salary Reduction Plans
Copyright© 2021. PSCA. All rights reserved.
Salary Reduction Plans - Example
401(k) Mirror Plan
Copyright© 2021. PSCA. All rights reserved.
Supplemental Executive Retirement Plans (SERPS)
Benefit Restoration Plans (BRPs)
Copyright© 2021. PSCA. All rights reserved.
Long-Term Incentive Plans (LTIPs)
Knowledge Checks – Question 1
Correct Answers:
• Do not have statutory limits on how much can be deferred
• Must be limited to a select group of employees
• Plan assets remain those of the employer until distributed
Copyright© 2021. PSCA. All rights reserved.
Knowledge Checks – Question 2
Correct Answer: FALSE
Rationale: Long Term Incentive, 401(k) Mirror, and Supplemental Executive Retirement
“golden handcuff” Plans are common nonqualified deferred compensation plans. An
Employee Stock Ownership plan is a type of qualified plan that you will learn about more
in another section.
Knowledge Checks – Question 3
Correct Answer: Consider a 401(k) mirror plan
Rationale: A 401(k) mirror plan is your best option as it is a nonqualified plan, and
therefore can be designed to benefit the top 5 executives at the exclusion of other
employees. This type of nonqualified plan also allows the selected group to defer
compensation and bonuses above the statutory 401(k) limits.
Copyright© 2021. PSCA. All rights reserved.
NQDC Plans – Tax Treatment
Notes:
Nonqualified deferred compensation plans do not provide the same tax benefits to employers and employees, as qualified plans. The key to these differences is based on a general tax principle referred to as “constructive receipt.”
From the perspective of the IRS, until the income is received, taxes need not be paid.
And thus, this deferred compensation is not taxable to the employee, nor is it deductible
by the employer, until receipt.
Constructive Receipt
Copyright© 2021. PSCA. All rights reserved.
NQDC Plans – More on Tax Treatment
Notes:
A mechanism that can provide some assurance to employees in these situations is to fund those benefits with a trust. While that trust can provide security against the change of heart by an employer, the assets remain subject to the claims of creditors if the
employer declares bankruptcy.
This type of trust, referred to as a "Rabbi" trust, provides additional assurance to the employee, but, since the assets remain subject to the call of creditors, preserves the required "substantial risk of forfeiture.
The main purpose of establishing a Rabbi trust is to offer a level of security to the
employee with respect to their nonqualified benefits. While the assets must be subject to the claims of the employer's creditors at all times, the trust offers the participant
protection against a change of heart by the employer, or a change of control. In fact,
Rabbi trusts are frequently written with a trigger that requires full funding of these programs upon a change of control.
Why is it called a “Rabbi” Trust?
Copyright© 2021. PSCA. All rights reserved.
Section 3: Stock Plans Stock Plans
Notes:
Programs that allow workers to invest in stock of their employer can provide a powerful incentive and retention tool, aligning the interests of workers with organizational objectives, and putting stock in the hands of sympathetic investors.
Additionally, certain types of employer stock plans provide special tax benefits for both
employer's and employee's.
We will discuss three of these programs here:
Stock bonus plans
Employee Stock Ownership Plans, or ESOP's, and, Employee Stock Purchase Plans.
Stock Bonus Profit-Sharing Plans
Copyright© 2021. PSCA. All rights reserved.
Stock Bonus Plans – More Info
Employee Stock Ownership Plans (ESOPs)
Copyright© 2021. PSCA. All rights reserved.
ESOPs – More Info
Employee Stock Purchase Plan (ESPP)
Copyright© 2021. PSCA. All rights reserved.
ESPP - Example
Knowledge Checks – Question 1
Correct Answer: ESOP
Rationale: An ESOP is a qualified plan that is like a profit-sharing plan and is designed to invest primarily in the stock of the sponsoring employer and encourage employee
ownership.
Copyright© 2021. PSCA. All rights reserved.
Knowledge Checks – Question 2
Correct Answers:
• The employer could fund an employer contribution to its existing 401(k) plan using employer stock
• The employer could add an ESOP
• The employer could adopt an employee stock purchase plan separate from its existing profit-sharing plan
Rationale: The employer can make profit sharing and matching contributions in the form of employer stock and include this feature in its existing profit sharing plan.
However, privately held companies have a variety of issues like valuation of the stock
when calculating its tax deduction for the contribution and allocating the right amount
of stock to participants’ accounts which is based on the stock’s value.
An ESOP is a profit sharing plan that is designed to primarily invest in employer stock.
The same valuation issues apply to an ESOP as discussed above if the company’s stock is not widely traded on public markets.
Employers that are publicly traded commonly offer a qualified stock purchase plan to a
wide group of employees. This type of plan allows employees to purchase employer
stock at a discount. This type of plan is qualified in that it must meet certain tax rules
that are different than the qualified plan rules applicable to profit sharing plans.
Copyright© 2021. PSCA. All rights reserved.
Section 4: HSAs HSAs
Health Savings Accounts (HSAs)
Notes:
Health savings accounts, or H.S.A's, were designed by Congress to help individuals covered by high deductible health plans to pay for qualified medical expenses on a tax- free basis.
Since then - amidst growing concerns about the costs of health care in retirement, many
have discovered that H.S.A's have the potential to serve as a supplemental retirement
savings vehicle. This is particularly important in view of the additional medical costs in retirement not covered by Medicare.
HSA – Tax Benefits
Copyright© 2021. PSCA. All rights reserved.
HSA – Eligibility
Notes:
Individuals are eligible for an H.S.A. if they are:
• Covered by a qualified high deductible health plan,
• Not covered by any other non-high deductible health plan,
• Not enrolled in Medicare; and
•
