The Tamperproof Benefits Package
Sprinkle, R. David, Chief Executive (U.S.)
Aside from equity holdings, a CEO's most valuable asset may be a non-qualified benefits plan. But recent changes in tax codes and corporate compensation policies--to name but two factors--have placed many such plans at great risk.
Moreover, because of increasing restrictions on qualified benefits plans--including 401(k)s, and pension and profit-sharing plans--non-qualified benefits now comprise a larger component of CEO net worth and post-retirement compensation. In fact, for some top-level executives making over $200,000 per year, non-qualified plans may represent over 75 percent of capital accumulation and retirement benefits.
With that much at stake, the development of a protection strategy for these assets is essential. Here's how to preserve and maximize the value of your non-qualified package.
Qualified plans are governed by the Employee Retirement Income Security Act (ERISA) and must be offered to all employees. But tax law changes have steadily restricted the benefits that can be offered to middle-and senior-level executives through these plans, thus hampering the ability of executives to plan for retirement. Today, executives can receive no more than $112,221 annually from qualified pension plans, down from $136,000 in 1982. The maximum amount that can now be contributed to an executive's qualified defined contribution plan is $30,000 per employee, down from $45,475 in 1982. Qualified benefits have also been curtailed on a stand-alone basis. For example, the maximum that an employee can contribute to a 401(k) plan is $8,728, down from $30,000 in 1982.
Because of such restrictions--and the fact that not all companies offer an array of qualified benefits--many executives earning over $75,000 are likely candidates for a non-qualified plan. This plan can be custom-tailored to enhance benefits for top management and to help the corporate sponsor attract, motivate, and retain top-level talent.
Both qualified and non-qualified benefits rely on compounding and investment appreciation for maximum growth over time. By definition, qualified plans grow on a tax-deferred basis. Non-qualified plans can also defer taxes, depending on the underlying asset that is employed. The similarities, however, usually end here.
Funds for qualified plans must be secured in a financial institution or trust, i.e., they are placed outside the company and disbursed by a third party upon the beneficiary's retirement, disability, or death. Non-qualified plans are most often held in the corporate treasury and are disbursed at the corporation's discretion.
Non-qualified plans are therefore subject to the claims of general creditors should the corporation become insolvent. They can also be subject to the risk that the corporate sponsors may refuse to pay in spite of a contractual obligation, thus necessitating that the participant sue for the benefit, likely resulting in a discounted settlement.
These actions could occur either prior to, or during, retirement. To be sure, a retired executive's negotiating power is limited, at best.
In addition to mergers and acquisitions, several factors pose unprecedented threats to non-qualified benefits. These include the leveraged position of many corporations, pressure by institutional investors to reduce executive compensation, the increased likelihood of boards of directors making changes in senior management and their compensation and benefits, and the need of companies to generate cash and to improve earnings in difficult economic times.
Most plans for CEOs have been established by a corporation, at its discretion. The plans are generally, but not always, substantiated by a written agreement and/or board resolution.
As a result, the first step many CEOs should take is to project and quantify the current and future value of qualified and non-qualified benefits to determine the magnitude of their exposure to a possible loss of the latter. …