This document discusses the pros and cons of qualified and non-qualified deferred compensation plans. It explains that non-qualified plans allow employers more flexibility in selecting participants and setting contribution amounts compared to qualified plans, but non-qualified plans require employers to defer tax deductions. A major con of non-qualified plans is complying with Section 409A, which introduces penalties for failing to follow specific rules. The document also notes that non-profits face additional challenges with non-qualified plans due to risks of forfeiture.

1. DEFERRED COMPENSATION
PROS & CONS
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2. DEFERRED COMPENSATION:
THE PROS & CONS
Just what is deferred compensation?
• Service provider has a legally binding right during the current
taxable year to compensation that is (or may be) payable in a
future taxable year
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3. DEFERRED COMPENSATION:
THE PROS & CONS
Qualified Plan vs. Non-qualified deferred
compensation
• Qualified Plan deferred compensation
− 401(k) and 403(b) deferrals Yes
− 401(k) and 403(b) employer contributions? Hmmm . . .
− Defined Benefit Plan Hmmm . . .
• Non-qualified deferred compensation (NQDC)
− Stock appreciation rights Yes
− Supplemental executive retirement plan Yes
− Incentive stock option (ISO) No
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4. DEFERRED COMPENSATION:
THE PROS & CONS
Qualified vs. Non-qualified deferred compensation
• The single major tax difference:
− Qualified deferred compensation
− Income tax is deferred by participant
− Employer takes current wage expense deduction
− Non-qualified deferred compensation
− Income tax is deferred by participant
− Employer deduction is deferred (until income
recognition)
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5. DEFERRED COMPENSATION:
THE PROS & CONS
Qualified vs. Non-qualified deferred compensation
• Who can implement non-qualified deferred compensation?
− Any entity
− Corporations (C or S)
− Partnerships
− LLCs
− Whether for-profit or not-for-profit
− Large or small
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6. DEFERRED COMPENSATION:
THE PROS & CONS
Pros of Non-qualified deferred compensation
• Tax code qualified retirement plan rules do NOT apply
− No minimum participation rules
− No non-discrimination rules
− No minimum vesting rules
− No distribution rules – for the most part (409A!)
• ERISA rules generally do NOT apply
Must file Statement to procure 5500 exemption (often forgotten)
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7. DEFERRED COMPENSATION:
THE PROS & CONS
Pros of Non-qualified deferred compensation
• Employer can generally pick and choose whom to cover
Select group of HCEs or Management
• Generally, no minimums or maximums on amounts deferred
• Plans can provide for EE deferrals and/or ER contributions
• A potential way to provide a “piece of the action” – synthetic
equity
− Stock Appreciation Rights (SARs)
− Phantom Stock
• Potential FICA savings (early inclusion rule)
• Great flexibility
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8. DEFERRED COMPENSATION:
THE PROS & CONS
Cons of Non-qualified deferred compensation
• It’s still “compensation”!
− Ordinary income tax rates
− FICA applies
• Assets are subject to creditors until distributed (plan must be
“unfunded”)
• No ability to roll distributions over to an IRA or similar vehicle
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9. DEFERRED COMPENSATION:
THE PROS & CONS
Cons of Non-qualified deferred compensation
• Employer must defer tax deduction
• Liability on Employer’s balance sheet
• Can present a future cash drain if not properly planned for
• Section 409A!
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10. DEFERRED COMPENSATION:
THE PROS & CONS
Cons of Non-qualified deferred compensation
• How does Section 409A change the landscape?
− Introduces formalities that MUST be followed
− Draconian penalties for failures
− Code Section and Regulations are exceedingly complex
− No Employers are exempted (large, small, for-profit, non-
profit)
BUT –
Work with a good advisor and all should be fine.
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11. DEFERRED COMPENSATION:
THE PROS & CONS
Cons of Non-qualified deferred compensation
• A major Problem specific only to non-profit entities:
Substantial Risk of Forfeiture
• This alone is a killer for many non-profits
• So what are non-profits doing?
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12. DEFERRED COMPENSATION:
THE PROS & CONS
Non-qualified Deferred Compensation
• Being used more than ever
• Synthetic equity is very popular
• Section 409A is not proving to be a deterrent (nor should it)
• There is lots of room for creativity
• Any entity can make use of NQDC
• Watch out for ‘hidden’ deferred compensation
• Don’t let the tax tail wag the dog!
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