Nonqualified Deferred Compensation Arrangements

Benefits under qualified retirement plans are limited by nondiscrimination testing rules and other Internal Revenue Code requirements. Therefore, many employers establish nonqualified deferred compensation plans to provide additional tax-deferred benefits to executives and other senior management. Non-qualified plans come in many shapes and sizes, including 401(k)-like elective deferral plans, severance plans and excess benefit plans that provide benefits over and above qualified plan limits. Due to interactions with ERISA, non-qualified plans must be unfunded, and they must limit eligibility to a select group of management or highly-compensated employees (hence, the common name “top hat” plans).

In recent years, non-qualified deferred compensation plans have come under increased governmental regulation and scrutiny, and severe tax penalties now apply under Tax Code Section 409A if a plan fails to meet numerous technical and operational requirements. These new rules go far beyond the IRS’s traditional “constructive receipt” doctrine and largely prohibit plan designs that give employees discretion and control over the timing and form of payment after the date compensation is initially deferred.

We represent clients on a wide range of issues involving non-qualified plans, including:

  • Plan design and formation
  • Advising on Tax Code Section 409A plan document and operational compliance
  • Drafting and reviewing plan documents and amendments, employee communication materials, and election forms
  • Establishing “Rabbi Trust” funding arrangements
  • Assisting on administrative issues, including participant claims and appeals and domestic relations orders
  • Advising on “top hat” health and welfare plans
  • Representation of nonqualified plans and plan sponsors in IRS correction programs
  • Addressing the unique deferred compensation issues facing governmental and tax-exempt entities, and developing effective Code Section 457(f) arrangements for such employers

Our goal is to assist clients in developing non-qualified plans that not only effectively defer taxation and meet new technical compliance requirements, but also provide a valuable tool for attracting and retaining key employees.