Select Page

Deferred Compensation
UMKC School of Law
Hoyt, Christopher R.

Deferred Compensation: Hoyt: Spring 2013

Objective is to maintain the same standard of living as when you were working.

Pension income will come from 3 sources:

· Social Security

o For 73% of Americans, this is a majority of their pension income.

o For 30% it is their only pension income.

o Most is 30-40k per year for the higher earners, and 15-20k for the lower income.

· Company Pension

o After WWII, labor unions made headway into making the companies have pension plans for their employers.

o Defined benefit plans: Monthly check each month that the company pays to you.

§ Private sectors typically pay out 10k per year.

§ Public is typically 20k per year.

ú Most of these plans have been replaced with 401k plans.

o We are seeing a lot more situations where people are not saving enough to make it by the end of their working lives.

· Your own savings

· Working after you retire.

Social Security: Kicks in at 65

· 1950=life expectancy of 63.

o 8 workers for every 1 retiree.

· Now=76 life expectancy.

o 2020: 2 workers for every 1 retiree.

Qualified Retirement Plans

· Big plans for saving money.

· 3 stages of QRP

o Accumulation stage

o Retirement

o Liquidation after death

· 3 phases of QRP

o Deduct into the plans.

§ If you put in $1k, then you get a $1k tax deduction.

§ As it grows, it is a tax exempt trust.

o Investment – tax exempt trust

o Distribution – this is when they tax you

Types of QRPs

· Company Plans (3 types)

o Account plans

§ Defined Contribution: put money into the an account for every year that the employee works for the employer.

§ Types:

ú Money purchase pensions

ú Profit sharing plans

ú 401k plans

· Take money out and put it into an account.

· Code section 408.

ú Stock bonus plans

ú ESOPs

o Annuity plans

§ Employees get a certain amount of what they earned while they worked.

§ Defined benefit plans

o Charities and Government Employers (Section 403(b and 457(b)).

§ Tax-sheltered custodial accounts

§ Tax-sheltered annuities

Non-Deductible IRA

· You do not want to have a non-deductible IRA.

Roth IRA

· You will not have to pay any tax when you take the money out because you paid taxes when you put the money in.

· What must you do to qualify for a Roth IRA?

o You have to work

o Max contribution of $5k or 100% of income

o Contribution is limited is adjusted gross income is over $95k ($150k for married filing jointly). A Roth IRA is not available to a person whose adjusted gross income is over $120k ($177k for married filing jointly).

o No tax deduction at time of contribution.

o MAIN APPEAL: After 5 years, all distributions of the accumulated investment income from Roth IRA will be tax-exempt if the distribution is made.

§ (a)

§ (b)

§ (c)

Non-Qualified Plans

· The big picture is that this is essentially just contract law.

· Perspective of the employee and employer.

xed for the money they pay in.

Why should a company offer a plan?

· In order to compete with other companies.

· You are forced to.

· Sense of social responsibility.

Timeline of Activities

· 1930s

o Social Security enacted

· 1940s and 50s

o Labor unions negotiate and they want pension plans.

§ They wanted pension plans that provide them with income for the rest of their lives.

o Typical plan is a defined benefit plan.

§ D/B formula typically:

ú %x(COMP)x(# of years of service)

§ 2% x 5 highest average years x # of years

o Life expectancy was 68 in 1958.

§ Now it is 78, so it is longer.

· 1960s

o Studebaker and

o White Motor Company:

§ These two companies went bankrupt, so all of the employees who were promised pensions were just fucked.

o IRS was concerned with discrimination for the highly paid executives.

§ They also wanted to make sure that all of the employees were properly compensated.

o Department of Labor decided that they needed a way to protect employees when companies went bankrupt.

· 1974

o ERISA was enacted on Sept 1, 1974.

o Employee Retirement Income Security Act

§ You will see things like 26 USC something

§ 29 USC something or

§ ERISA §