Employers often provide executives and key employees various forms of deferred compensation such as deferred bonuses, Supplemental Executive Retirement Plans, Excess Benefit Plans, Severance Plans and Phantom Stock or Stock Appreciation Rights (SARs) designed to compensate the executive for performance now but to defer taxes by paying the compensation in the future. In addition, such employees are often compensated with an equity stake in the business in various ways. Corporations can issue options to buy stock or grants of restricted stock. Limited liability companies can provide restricted membership interests or profits interests. Executive Compensation techniques can be used to reward performance and loyalty, to ensure executives participate in a change in control of the business, to help fund the succession of the business by one or more key employees, and to permit them to save for retirement in amounts above the limits permitted under tax qualified plans. Any such arrangement must be carefully structured to ensure it does not become a plan that must be provided to most employees under ERISA rather than to a select group of management and highly paid employees. Additionally, the arrangement must be crafted so the executive is not in constructive receipt of the income or otherwise has the economic benefit from it to avoid current taxation. Finally, any arrangement that may defer the receipt of compensation earned in one year into another year may be considered a deferred compensation arrangement governed by Internal Revenue Code section 409A. If the arrangement does not meet the requirements of section 409A, there are severe tax consequences to the employee or independent contractor earning the compensation. The compensation is taxed when the worker has a vested right to it, plus it is subject to an additional 20% Federal tax. If the worker is subject to California state income tax, he or she will be subject to an additional 20% California tax, as well. The Burton Law Firm’s attorneys can design and structure appropriate deferred compensation arrangements to meet the requirements of Code section 409A and also avoid current taxation to the worker. In addition, due to the complexity of this area, it is not uncommon to discover that an arrangement does not comply with the requirements under section 409A and the regulations. We can also work with clients to correct such noncompliant plans to minimize the effect of noncompliance.
Nonprofit, tax exempt organizations, such as charities have additional concerns when it comes to compensating executives. The rules and regulations governing these organizations are different than those governing for-profit businesses. Likewise, the goals behind the benefit may be different. Their motivation is to compete with the private sector for executive talent, yet they cannot provide the executive with equity in the enterprise. Additionally, paying unreasonable excessive compensation can subject the organization or its managers to tax penalties and even loss of tax exempt status. The law also defines what kind of employee benefit plans they may provide.
Likewise, governmental entities have restrictions on the benefits they can provide to an executive, including the requirement that the deferrals to any deferred compensation arrangement be held in a trust for the exclusive benefit of the employees under Internal Revenue Code section 457. California governmental organizations must also be concerned with complying with the “Impairment of Contract” doctrine as well as the recently enacted Public Employees’ Pension Reform Act of 2013 (PEPRA). The Burton Law firm’s attorneys can assist these organizations in navigating the complex regulations governing their provision of employee benefits.