Successful succession planning often involves the use of deferred compensation arrangements with key employees. Such arrangements are designed to generate employee loyalty, and keep the key employee on board after the owners have moved on.
Deferred compensation arrangements come in many shapes and sizes. Many deferred compensation arrangements are structured so that the amount of deferred compensation is determined by increases in the value of the company, sales volume, net profits, reduction in expenses or other measurable factors within the influence of the employee.
When setting up drafting a deferred compensation arrangement it is important to make sure the arrangement complies with Internal Revenue Code section 409A. Code section 409A was enacted to prevent executives from controlling the timing of cash distributions under deferred compensation arrangements. Under Code section 409A, the timing of payments under a deferred compensation arrangement must be specified in the agreement, and with limited exceptions may not be further deferred or accelerated. Care should be taken when amending an existing deferred compensation arrangement to avoid making a change that accidentally violates Code section 409A.
If a deferred compensation arrangement does not meet the requirements of Code section 409A, the compensation is subject to certain additional taxes, including a 20% ADDITIONAL income tax. Section 409A has no effect on FICA (Social Security and Medicare) tax.
Will talk more about deferred compensation arrangements and succession planning in future blogs. Please give me a call if you want to discuss any questions about deferred compensation arrangements. Jsenney@pselaw.com or 937-223-1130.
AND ONE MORE THING. Shahrzad Allen is now working with PS&E. Shahrzad does immigration work. If you or one of your clients needs assistance with a VISA or other immigration matter, please give me or Shahrzad Allen a call. Jsenney@pselaw.com or Sallen@pselaw.com or 937-223-1130.
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