Deck 11: Nonqualified Deferred Compensation Plans for Executives

Question 1

The Age Discrimination in Employment Act does not forbid employers from setting a mandatory retirement age for employees who are 65 years old.(Mandatory Retirement Age)

Answer 1

True

Question 2

Constructive receipt guides the timing of an executive's obligation to pay income taxes for funded nonqualified plans.(Funding Mechanisms)

Answer 2

True

Question 3

The endorsement approach designates the employer as owner.(Split-Dollar Life Insurance)

Answer 3

True

Question 4

Trust funds and insurance contracts do not secure an employer's promise to make future payments.(Funding Status)

Question 5

Capital gains is the term used to describe the market value of stock options as listed on the NYSE.(Stock Options)

Question 6

Corporate-owned life insurance can be used by employers to recover the costs of nonqualified deferred compensation.(Corporate-Owned Life Insurance)

Question 7

For funded plans,executives generally pay federal income taxes when they begin to receive payments from these plans.(Funding Mechanisms)

Question 8

Funded plans allocate money to trust funds or insurance company contracts in an executive's name.(Funding Status)

Question 9

Top hat plans are unfunded plans.(Supplemental Executive Retirement Plans (SERPs))

Question 10

Collateral approach is a term used to indicate employer ownership of an insurance policy.(Split-Dollar Life Insurance)

Question 11

Excess benefits plans can only be funded plans.(Excess Benefit Plans)

Question 12

The IRS limits the annual benefit amounts for a defined benefit plans to the lesser of $185,000 in 2017.(Defining Nonqualified Deferred Compensation Plans (NQDC))

Question 13

Excess benefit plans generally have longer vesting periods than SERPs.(Contrasting Excess Benefit Plans and SERPs)

Question 14

ERISA Title I specifies minimum standards for participation and vesting protections for participants and beneficiaries.(ERISA Qualification Criteria)

Question 15

The Securities Exchange Act of 1934 requires disclosure of company financial information and information about executive compensation practices; all companies must comply.(Securities Exchange Act of 1934)

Question 16

Only ERISA Title I holds provisions setting minimum standards required to qualify pension plans for favorable tax treatment.(ERISA Qualification Criteria)

Question 17

The IRS uses the term "key employees" for nondiscrimination rules in employer-sponsored health insurance plans.(Who are Executives?)

Question 18

An employee in a high policymaking role manages the overall company and directs the work of two or more people.(Mandatory Retirement Age)

Question 19

A stock option is a company's offering of stock to an employee.(Basic Terminology)

Question 20

The IRS has no impact on nonqualified plans.(Defining Nonqualified Deferred Compensation Plans (NQDC))

Question 21

The IRC recognizes highly compensated employees and key employees but only highly compensated employees serve in executive leadership roles and participate in executive compensation and benefits plans.(Who Are Executives?)

Question 22

The Securities Exchange Act of 1934 is also commonly referred to as the Dodd-Frank Act.(Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act))

Question 23

ERISA Title I exempts nonqualified plans from fiduciary responsibility.(Supplemental Executive Retirement Plans (SERPs))

Question 24

This type of executive retirement plan is unfunded and can be issued upon retirement,termination,or death,but the assets must be released to creditors if the company files for insolvency or bankruptcy.(Rabbi Trusts)

A)Employee-owned annuities
B)Secular trusts
C)Rabbi trusts
D)Corporate-owned life insurance

Question 25

Companies use platinum parachutes to avoid legal battles or negative media publicity by paying off a CEO to give up his or her post.(Platinum Parachutes)

Question 26

When considering funding mechanisms,employee-owned annuities offer the highest level of security.(Funding Mechanisms)

Question 27

One of the objectives of nonqualified plans is restoration.(Defining Nonqualified Deferred Compensation Plans (NQDC))

Question 28

A company may choose to add to the vesting period a performance criterion for determining whether to award stock options or stock units,commonly referred to as restricted stock units.(Restricted Stock Plans and Restricted Stock Units)

Question 29

With unfunded plan,executives may forfeit retirement benefits when a company becomes bankrupt or financially insolvent or following a change of company ownership.(Funding Status)

Question 30

Disposition is the sale of stock by the stockholder.(Basic Terminology)

Question 31

According to the IRS,for nonqualified plans employers typically deduct expenses only when the employee receives income from the plan in the future.(Defining Nonqualified Deferred Compensation Plans (NQDC))

Question 32

Qualified plans allow executives to accumulate substantially more money for retirement than nonqualified plans.(Defining Nonqualified Deferred Compensation Plans (NQDC))

Question 33

According the U.S.Treasury Regulations,the term "officer" means an administrative executive who is in regular and continued service and holds the authority of an officer,regardless if they hold the title of an officer.(Key Employees)

Question 34

Secular trusts are subject to a company's creditors in the event of bankruptcy or insolvency.(Secular Trusts)

Question 35

Stock grant refers to sale of stock by the stockholder.(Basic Terminology)

Question 36

A funding mechanism is synonymous with funded plans.(Funding Mechanisms)

Question 37

Exercise of stock option refers to an employee's purchase of stock using stock options.(Basic Terminology)
24.Companies benefit from golden parachute payments because they can treat these payments as business expenses.(Golden Parachutes)

Question 38

Under SERP,nonexecutive employees earn an annual retirement benefit equal to 50% of the highest average annual salary for a consecutive three-year period.Defining Nonqualified Deferred Compensation Plans (NQDC))

Question 39

Executive retirement plans adhere to ERISA's nondiscrimination rules.(ERISA Qualification Criteria)

Question 40

Funding mechanisms provide the financial resources only for funded plans.(Funding Mechanisms)

Question 41

Top hat plans are exempt from which ERISA Title I regulation? (Supplemental Executive Retirement Plans (SERPs))

A)Funding
B)Reporting and disclosure
C)Continuation coverage
D)Administration and enforcement

Question 42

According the Internal Revenue Code,this person was a five percent owner at any time during the year or the preceding year; or,for the preceding year,the employee had compensation in excess of $120,000 in 2017 and was in the top-paid group of employees.(Highly Compensated Employees)

A)Highly compensated employee
B)Key Employee
C)Bona fide executive
D)High policymaker

Question 43

Who are executives? Explain.(Defining Executive Employment Status)

Question 44

Which one of the following is a funded plan? (Secular Trusts)

A)General asset approach
B)Secular trusts
C)Corporate life insurance
D)Rabbi trusts

Question 45

Which one of the following is not a characteristic of employee owned annuities? (Employee-Owned Annuities)

A)Offers financial security
B)Third party vendors are involved
C)Employee pays the cost of the annuity
D)Not subject to ERISA provisions

Question 46

What was the IRS limit for annual earnings amount for determining qualified plan benefits in 2017? (Objectives of Nonqualified Plans)

A)$150,000
B)$170,000
C)$200,000
D)$270,000

Question 47

Which is not a factor associated with the decision to fund a nonqualified plan? (Funding Status)

A)Shareholder expectations
B)Costs
C)Liability management
D)Press coverage

Question 48

Nonqualified retirement plans for executives are generally divided into these two broad classes.(Nonqualified Retirement Plans for Executives)

A)Top hat plans and supplemental executive retirement plans
B)Excess benefit plans and supplemental executive retirement plans
C)Offset benefit plans and supplemental executive retirement plans
D)Target benefit plans and supplemental executive retirement plans

Question 49

This provides income to executives at the end of a designated period and executives never have to exercise their stock rights to receive income.(Stock Appreciation Rights)

A)Restricted stock plan
B)Stock appreciation rights
C)Phantom stock plan
D)Nonstatutory stock options
Essay Questions

Question 50

Which of the following is not one of the objectives of SERP? (Supplemental Executive Retirement Plans (SERPs))

A)Use of SERPs as a tool in executive-level succession planning
B)Rewarding substantially higher retirement benefits
C)Compensating for long-term employment
D)Compensating for older new hires

Question 51

Which one of the following is not true about stock appreciation rights? (Stock Appreciation Rights)

A)Provide income to executives at the end of a designated period,much as with restricted stock options
B)Executives always have to exercise their stock rights to receive income
C)The company simply awards payment to executives based on the difference in stock price between the time the company granted the stock rights at fair market value to the end of the designated period,permitting the executives to keep the stock
D)Neither the employee nor employer pays taxes when stock appreciation rights are granted

Question 52

Which of the following is not a feature of excess benefits plans? (Excess Benefit Plans)

A)Extended provisions of existing qualified plans
B)Increased retirement benefits by the amount lost due to limits set by the Internal Revenue Service
C)Funded excess benefit plans are subject to ERISA regulations
D)Unfunded excess benefit plans are subject to some ERISA regulations

Question 53

Which of the following is not true of the endorsement approach under the split dollar insurance plan? (Split-Dollar Life Insurance)

A)Employee pays for most or the entire premium
B)Employer has the right to borrow against the cash value of the policy for business purposes
C)Executive reimburses the employer for aportion of the premium cost
D)Employer names itself as beneficiary

Question 54

A phantom stock plan is characterized by which one of the following? (Phantom Stock Plans)

A)Board of directors compensate executives
B)There are no specific conditions for converting these into shares
C)There are no tax advantages
D)Retirees' income tax is higher

Question 55

Which of the following is not a type of stock option plan? (Stock Options and Stock Purchase Plans)

A)Stock appreciation rights
B)Phantom stock plans
C)Restricted stock units
D)Profit sharing

Question 56

Which of the following ERISA Title I parts does not apply to nonqualified plans? (Supplemental Executive Retirement Plans (SERPs))

A)Funding
B)Reporting and disclosure
C)Fiduciary responsibility
D)Administration and enforcement

Question 57

Which one of the following is not a feature of corporate owned life insurance? (Corporate-Owned Life Insurance)

A)Employers use it to recover cost of qualified plans
B)Designated amount paid to designated beneficiaries of deceased
C)The goal is to purchase policies that match the amount of deferred compensation promised to executives
D)Using it does not create a funded plan

Question 58

Nonstatutory stock options are characterize by which one of the following features? (Stock Options)

A)They qualify for favorable tax treatment
B)They are awarded at discounted prices
C)Executives do not have any ownership control over the disposition of the stock for 5 to 10 years
D)Executives pay taxes in the future when they choose to exercise their nonstatutory stock options

Question 59

Rabbi trusts are characterized by which one of the following features? (Rabbi Trusts)

A)Is a revocable grantor trust
B)Employer maintains ownership
C)No financial lending institutions are involved
D)Are funded plans

Question 60

These clauses in the employment agreement provide pay and benefits to executives after a termination that results from a change in ownership or corporate takeover.(Golden Parachutes)

A)Platinum Parachutes
B)Mandatory Retirement
C)Golden Parachutes
D)Top Hat

Question 61

Explain the difference between a golden parachute and a platinum parachute.(Separation Agreements)

Question 62

Briefly discuss the issue of mandatory retirement age with regard to nonqualified plans.(Mandatory Retirement Age)

Question 63

Discuss the main features of top hat plans.(Supplemental Executive Retirement Plans (SERPs))

Question 64

Define and provide main characteristics of one unfunded funding mechanism and one funded funding mechanism.(Funding Mechanisms)