Extended Employee Benefits

Extended benefits, while perhaps not having the significance of the deferred-compensation, life insurance, incentive and perhaps disability benefits discussed in other sections, they yet may provide a significant portion of an executive's compensation. These may even provide tax benefits for both the employer and executive.

Benefits can include: financial planning, loans to executives reimbursement of moving costs, company cars or reimbursement of auto expense, dues to social clubs, business clubs, professional organizations, meals, gifts and discounts, death-benefit only (salary continuation) plans, physical fitness programs, officer liability insurance, etc.

Non Qualified Plans

The fact that the plans discussed here are non-qualified is of considerable importance in their utilization in an employers total employee benefit plan strategy. Since these plans do not seek to be treated as qualified under the treasury regulations, the employer is free to discriminate as to who will be covered and the benefit levels that will be provided. This is particularly true if the plan is limited to a select group of management or highly paid employees.

The primary purpose of deferring compensation is to defer the taxation of that compensation with the goal of ultimately maximizing the after-tax dollars that will be available to the employee. What must be done to effectively defer taxation are the benefit provisions of a deferred compensation plan that will maximize the tax leverage, are the central focus of this discussion.

If the service necessary to earn said compensation has yet to be performed there will be no taxation until the compensation is actually received, even if the employee's right to the compensation is nonforfeitable. However, where a plan of deferred compensation is installed after the performance of the services that gives rise to the compensation, the IRS takes the position that there must be substantial forfeiture provisions in order to defer taxation of that compensation until the year in which it is actually received. Based on this view, a plan that deferred income until some actual stated period of time and, in addition, gave the employee the right to elect to further defer the income until an even more distant future date, would successfully defer the imposition of a tax until receipt of the deferred payments as long as the employee is subject to a realistic substantial risk of forfeiture up to the time of actual payment. If the employee were required to continue in the service of the employer or to both be encumbered by a non-compete clause and render consulting services at the employer's request could be considered substantial risk of forfeiture (only, however, if it were highly likely that the forfeiture would in fact occur if the specified conditions were not met or the required conditions were breached).

If the employee had no right to receive compensation until a future year no tax would be imposed until said year when due even if the imposing document contained no forfeiture provisions. However, if at the employees discretion, he or she voluntarily chose to further postpone receipt of the deferred payments and the amounts deferred are no longer subject to any risk of forfeiture, the IRS would likely hold that the employee had constructive receipt of the payments in the year in which the employee could have originally received them, even though they were not actually paid until some later date.

If a stockholder-employee were involved in a deferred compensation plan, special care should be taken. If the IRS determines that the amounts deferred are not reasonable, the excess amount could be held to be a constructive dividend and not compensation to said employee. Dividends are taxed as ordinary income to the employee with no deduction to the corporation.