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PART 6--REVIEW QUESTIONS AND ANSWERS
Answers and an explanation of all false items appear at the end of this section.
Circle your responses:
| T | F | 1. Nonqualified deferred-compensation plans are sometimes referred to as salary continuation plans, deferred-compensation plans, and nonqualified plans. (2.1) |
| T | F | 2. Nonqualified plans can bring an executive's retirement benefits up to desired levels when they are used as a second tier of benefits on top of a qualified plan. (2.2) |
| T | F | 3. Nonqualified plans are subject to nondiscrimination requirements similar to those used in qualified plans. (2.3) |
| T | F | 4. Fewer formalities are required to establish a nonqualified plan than to establish a qualified plan. (2.3) |
| T | F | 5. Nonqualified plans are generally considered to be more effective than qualified plans for recruiting, retaining, and retiring employees. (2.3-2.4) |
| T | F | 6. A golden handshake is a substantial payment made to corporate executives who are terminated upon change of ownership or corporate control. (2.5) |
| T | F | 7. A top-hat plan is similar to a 401(k) plan because it restricts salary deferrals to a stated dollar amount. (2.5) |
| T | F | 8. A top-hat plan must be maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. (2.6) |
| T | F | 9. Excess benefit plans are considered a type of employer-provided salary continuation plan. (2.7) |
| T | F | 10. A SERP is used if the employer desires to exceed the Sec. 415 limits. (2.7) |
| T | F | 11. If an offset SERP is used, benefits provided by the SERP are reduced by the benefits payable under the employer's qualified plan. (2.7-2.8) |
| T | F | 12. Under the rules governing 457 plans, the maximum amount that may be deferred under the plan in any year cannot exceed the lesser of $7,500 or one-third of the participant's compensation. (2.9) |
| T | F | 13. When a business is dependent on the special contributions of a few key executives, and the retirement of these executives may prove devastating to the profit-making ability of the organization, a consulting services provision should be part of the nonqualified plan design. (2.10) |
| T | F | 14. A well-designed consulting services provision will continue the employer/employee relationship. (2.10) |
| T | F | 15. If the client is concerned about persuading an executive to stay with the corporation until retirement, a so-called golden-handcuffs provision should be incorporated into the plan. (2.11) |
| T | F | 16. If executive recruiting is a strong concern, the golden-handcuffs provision should contain liberal vesting requirements. (2.11) |
| T | F | 17. A covenant-not-to-compete provision can bar a former employee from working in the same geographic region for the rest of his or her life. (2.11) |
| T | F | 18. Nonqualified plans can be designed to allow withdrawals prior to termination in the event of a financial hardship. (2.12) |
| T | F | 19. A nonqualified plan is restricted by ERISA from containing a death or disability benefit. (2.13-2.14) |
| T | F | 20. Executive bonus life insurance plans are sometimes known as Sec. 162 plans. (2.14) |
| T | F | 21. A nonqualified plan simultaneously gives an employer the benefit of an immediate tax deduction and an employee a deferral of tax. (2.15) |
| T | F | 22. Nonqualified plans have lower administrative costs than qualified plans. (2.16) |
| T | F | 23. It generally costs more than a dollar to provide a dollar's worth of nonqualified plan benefits. (2.16) |
| T | F | 24. The doctrine of constructive receipt is triggered if there is an irrevocable transfer of funds made on the executive's behalf that provides a benefit to the executive. (2.17-2.18) |
| T | F | 25. Sec. 83 is a codification of the constructive receipt doctrines in employment-related situations. (2.18) |
| T | F | 26. A plan is considered funded if a reserve is set up to pay a nonqualified benefit, but the assets of the reserve are retained as assets of the corporation and are subject to attack by creditors of the corporation. (2.21) |
| T | F | 27. Key executives always prefer that their nonqualified plan be an unfunded, unsecured promise made by the employer. (2.21) |
| T | F | 28. Funds placed in a rabbi trust are not subject to the claims of an employer's creditors. (2.21) |
| T | F | 29. In order to receive a favorable ruling, a rabbi trust must contain an insolvency trigger. (2.21) |
| T | F | 30. A rabbi trust is a funded plan for ERISA purposes. (2.20-2.21) |
| T | F | 31. Rabbi trusts provide no benefit security for executives if an employer goes bankrupt. (2.20-2.21) |
| T | F | 32. Like a rabbi trust, a secular trust can be used to defer the taxation of an employee on a contribution made in his or her behalf. (2.23-2.24) |
| T | F | 33. The employer should buy an executive's surety bond in order to avoid unwanted tax consequences. (2.24-2.25) |
| T | F | 34. An unfunded supplemental executive-retirement plan will not be subject to any ERISA requirements. (2.26-2.27) |
| T | F | 35. The tax-free inside buildup that occurs in a life insurance policy is important to a nonqualified plan because earnings on nonqualified plan assets are not tax deferred. (2.27) |
| T | F | 36. Life insurance proceeds received by a company upon the death of an executive are received tax free. (2.26-2.27) |
| T | F | 37. By electing a life-income option, the employer can transfer to the insurance company the risk of an employee living beyond his or her normal life expectancy. (2.26-2.27) |
| T | F | 38. If a nonqualified plan is used, a one-page ERISA notice should be completed and sent to the Department of Labor. (2.27) |
Self-Test Answers
1-T, 2-T, 3-F, 4-T, 5-T, 6-F, 7-F, 8-T, 9-T, 10-F, 11-T, 12-T, 13-T, 14-F, 15-T, 16-T, 17-F, 18-T, 19-F, 20-T, 21-F, 22-T, 23-T, 24-F, 25-F, 26-F, 27-F, 28-F, 29-F, 30-F, 31-T, 32-F, 33-F 34-F, 35-T, 36-T, 37-T, 38-T
ANSWERS TO FALSE REVIEW QUESTIONS
3. Nonqualified plans are not subject to any nondiscrimination requirements.
6. A golden handshake is an additional benefit paid to induce early retirement. A golden parachute, however, is a substantial payment made to corporate executives who are terminated upon change of ownership or corporate control.
7. Top-hat plans are salary deferral plans without monetary restrictions.
10. A SERP satisfies the employer objective of complementing an existing qualified plan that is not stretched to the maximum limits by bringing executive-retirement benefits up to desired levels. The plan that is described is an excess-benefit plan.
14. If an employer/employee relationship exists, the executive will forfeit social security benefits that would have been payable, and the executive will lose the right to special 5- or 10-year forward-averaging tax treatment on distributions from the qualified plan. To avoid these problems, a consulting provision should be designed in such a way as to indicate that the former executive is now doing consulting services on an independent contractor basis.
17. A covenant-not-to-compete provision calls for the forfeiture of nonqualified benefits if the employee enters into competition with the employer. In order to be considered valid, the covenant-not-to-compete provision must be reasonable in terms of the geographical area and the time period over which it applies. Therefore a covenant that says a former employee can't compete in a certain region for his or her lifetime would definitely not be considered valid.
19. Nonqualified plans can contain both death and disability benefits. There is no such ERISA restriction.
21. The statement as written describes a qualified plan, not a nonqualified plan.
24. The doctrine of constructive receipt is triggered if an executive has the ability to control the time and the actual receipt of his or her income. The doctrine described is the doctrine of economic benefit.
25. The constructive receipt doctrine is different than the Sec. 83 rule.
26. The plan is considered funded when the company, in order to meet its promise of providing benefits under the nonqualified plan, contributes specific assets to an escrow or trustee account in which the employee has a current beneficial interest. The plan as described is considered informally funded, which means that it is unfunded for tax and ERISA purposes.
27. Unsecured promises pose major problems for executives because benefit payments hinge on the fiscal health of an employer at the time benefits become payable. Many employees remain skeptical about enjoying their current favored status when it comes time to collect. A change in management, business buyout, or decrease in rank due to performance problems or office politics may put an employee in an untenable position when he or she approaches the time to collect benefits.
28. Funds placed in a rabbi trust are subject to the claims of an employer's creditors.
29. In order to receive a favorable ruling, rabbi trusts should not contain an insolvency trigger.
30. A rabbi trust is not a funded plan for ERISA purposes.
32. Secular trusts differ from rabbi trusts in that employer contributions to a secular trust and any trust earnings are currently taxable to the employee. Money held in a secular trust cannot, however, be reached by any of the employer's creditors and therefore provides absolute security for executives against the company's insolvency.
33. In order to prevent the purchase of a surety bond from triggering a constructive receipt, economic benefit, or Sec. 83 problem, the executive must bear the cost of the surety bond, and the employer should not be involved with the bonding company.
34. Unfunded supplemental executive-retirement plans are subject to certain ERISA provisions. These include the reporting and disclosure, fiduciary, and ERISA enforcement provisions but not vesting, funding, and participation requirements.
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