Planning Opportunities For Highly Paid Executives

There are, however, a number of ways to design a plan to prevent the employer from invading these assets. Some plans can be designed with "financial triggers," which will pay out the deferred compensation benefit to the executive if the company reaches a certain financial point, explains James Connell Jr., director of Connell Associates, Camillus, NY.

"Typically there would be a specified trigger that would create a payout prior to it getting so bad that the company couldnt meet the obligation," he says.

Another protective measure is the use of a Rabbi trust to hold the assets set aside by the employer. Holding assets in a Rabbi trust does not protect the assets from the creditors of the company, but "a properly drafted Rabbi trust can prevent the business owner from accessing the monies for anything other than the deferred compensation payments," says Shapiro.

Furthermore, a Rabbi trust can protect the executive from the loss of benefits due to changes in management or a sale of the company, adds Kral.

But the business owner may not like the restrictions imposed by these methods and may want to have access to the funds for emergency purposes. "Its always a balancing act," says Shapiro. On one side youve got the business owner saying it would be nice to get to that money if its needed, he explains, and on the other side, youve got the executive saying he doesnt want the company to be able to touch that money.

Another situation that sometimes arises is that companies fail to fund the liability sufficiently from the onset of the plan. "They put in a plan but didnt fund it at adequate levels," explains Oliver.

"Many times their expectations were unrealistic as to what was going to be contributed," he says. "Or, maybe they didnt follow through on making sure the plan was funded."

Today, some agents are seeing plans that require additional funding, mostly due to the poor performance of the equity markets. "Were underfunded on a lot of these plans," says Kral.

It is very important to manage these plans on an annual basis and make adjustments accordingly, he says.

"You have to make sure there is sufficient funding. Or, youve got to account for the fact that youve got a liability on the books that you havent funded for a few years–youre in the hole and youre going to have to dig out," says Kral.

The type of protection put into place largely depends on the type of deferred compensation plan implemented, according to Connell. In a supplemental deferred compensation plan, the employer is providing an additional retirement benefit for an executive. The employer typically funds this benefit. In this situation, the employer will usually want to have access to those assets.

In an employee-funded plan, often referred to as a salary reduction plan, the executive actually defers income until retirement, or at some future time. In this case, "most employees are not going to defer their own dollars into the plan if theres no promise or protection if things change," Connell says.

"Sometimes well find that executives dont even want to participate unless theres a Rabbi trust," Shapiro adds.

Reproduced from National Underwriter Edition, June 23, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.