If you work with business owners or executives, in 2008 you have both an opportunity and an obligation to offer value in the area of executive benefits. Whether the benefit is deferred compensation, an executive bonus, stock options or split-dollar, key decisions need to be made this year.
Sorting through these areas can be difficult and time-consuming, but the price of ignoring these plans can be even more painful. For example, if certain deferred compensation plans are not updated to comply with IRC 409A this year, as much as 80% of an executive’s benefits might be taxed as ordinary income, interest penalties and excise taxes.
To effectively get both the company and the executive to focus on executive benefit plans, start by asking questions. The right questions will help determine what the most pressing executive benefit issues are. Among the questions to ask:
? Does the company have a deferred compensation plan and, if so, has it been reviewed for compliance with IRC 409A?
? Has the company reviewed its severance pay, performance bonus and equity plans to determine if IRC 409A affects them?
? Has the company advised executives of their distribution options in the deferred compensation plan? And have arrangements been made for them to change their options during the special open period of 2008?
IRC 409A is a welcome codification of rules related to deferred comp plans, but the law covers a broader array of executive benefit plans. This is a seminal year in which employers have a one-time opportunity to bring their plans into compliance and executives have an opportunity to change distribution options.
? Does the company have an executive bonus plan wherein the executive receives a life insurance or annuity policy as executive compensation?
? If appropriate, has the employer “grossed up” compensation to create a tax-neutral affect for the executive?
? If the employer and executive have agreed to restrictions on accessing policy values, are the restrictions filed with the insurer? Have the restrictions been reviewed to determine if they should still apply?
Executive bonus plans are increasingly popular because so many companies are now pass-through tax entities (S Corps, LLCs, etc). The plans can thus be tailored to the needs of both the company and each executive. The plans should be reviewed annually for appropriateness, proper tax reporting and to assure any restrictions are being handled under the agreed terms and in compliance with tax law.
Stock options–nonqualified stock options, incentive stock cptions, etc.