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PART 5--ANSWERS TO SELECTED STUDY QUESTIONS
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3. One of the first concerns the agent should have is whether Rhonda would be better served by a nonqualified plan or some other form of executive compensation, such as an incentive stock option plan, incentive pay, salary increases, executive bonuses, or some form of noncash reward (a company car or a country club membership). Rhonda should be made aware of the various executive-compensation techniques available, and the agent should discuss the advantages and disadvantages that each technique holds in Rhonda's situation.
If Rhonda feels that a nonqualified deferred-compensation plan is appropriate, the agent should help Rhonda fill out a nonqualified-plan fact finder. The fact finder will help Rhonda to prioritize her objectives and it will enable the agent to gather the information necessary for making insightful suggestions and rendering accurate advice.
9. Since JTE is dependent on Sue to bring in business through her personal contacts, JTE should strive to secure her unique talents beyond her retirement. The firm can protect against a drop in revenue when Sue retires by setting up a nonqualified plan that provides retirement benefits and requires her to continue working on a part-time consulting basis.
11.
a. The Rayco Nonqualified Plan can be designed to include a golden- handcuffs provision, which discourages executives from leaving the employment of your client by providing for the forfeiture of substantial benefits if service is voluntarily terminated prior to normal retirement age.
b. The law firm's nonqualified plan can be designed to include a covenant- not-to-compete provision, which calls for the forfeiture of nonqualified benefits if the employee enters into competition with the employer, either by opening a competing business herself or by working for a competitor. In order to be considered valid, the covenant-not-to-compete provision must be carefully drafted. The provision should be reasonable in terms of the geographical area and the time period over which it applies.
19.
a. The ABC transaction would not be considered a taxable event. In effect, ABC has informally funded its nonqualified plan. The informal funding does not fall into a constructive receipt/economic benefit/Sec. 83 trap because the employer has not made the funds available to the employee nor transferred the funds in such a way as to provide the executives with an economic benefit. Finally, for Sec. 83 purposes, the executives are not taxed because their rights in the property are not transferable (no "valued" interest has been exchanged), and the rights are subject to a substantial risk of forfeiture--the golden-handcuff clause.
b. The DEF officers are subject to immediate taxation on the amount of the bonus they could have taken in cash. The fact that these officers turned their backs on the compensation means that they constructively received the bonus. In addition, the transfer of funds to a trust for the employees leaves the officers open to economic benefit and Sec. 83 claims.
c. As long as the GHI Corporation has met the requirements for a rabbi trust, the key executive is not subject to taxation on the funds placed with the trustee.
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