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6 Important Issues, Corporate Spin Off: Part 3 - Deferred Compensation

| September 21, 2017
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Welcome to the third part of the Spurstone Executive Wealth Solutions 6 part series discussing executive compensation negotiations and benefit considerations during a corporate spin off. Through this series we will be covering topics to help you get a solid understanding of how your risks could increase or decrease, where you may become more "handcuffed" and major issues to understand and evaluate.

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Part 3 - Deferred Compensation

In today's corporate world, deferred compensation plans are common in most publicly traded companies. These plans can take many forms, shapes, names and acronyms so it can sometimes be difficult to navigate your specific options. These plans provide you with the opportunity to defer, or have deferred for you, components of your income to a future date or event. This ability to defer income may provide benefits in your own wealth planning strategies.

In this post, we will be covering just some of the issues you should pay close attention to as the transition approaches and occurs in order to be sure you understand how to best position your compensation based on your own personal needs.

First, it is critical to understand that any deferred compensation plan that is "non-qualified" (check your documents or contact HR to determine if yours is) is considered to be an on balance sheet asset of the plan provider. This means that if you utilize this type of platform, you are leaving your compensation on the balance sheet of your employer until it is distributed in the future as planned (side note: most qualified plans are actually unfunded plans by design or requirement but for the sake of simplicity we will save that topic for another day). The enormous issue with this fact is that in the event of a bankruptcy, you will become a creditor of the corporation with no guarantee of return of this compensation (Here is a relevant 2009 NY Times article discussing the topic).

So what does this mean to you? What this means is that before ever participating in a deferred compensation program, you should evaluate the financial stability of the employer and your comfort with the risk of becoming a creditor during the time your compensation will be held on their balance sheet which may be years into your retirement. You may have been comfortable with the financial strength of the parent company but will that still be true with the spinco?

The second important piece will be whether your existing deferred compensation will be transferred to the new spinco. While executing a corporate transaction, sponsors of non-qualified (NQ) deferred compensation programs that are designed to pay proceeds upon an employee’s separation from service must determine whether a separation has indeed occurred. With a change in control, if the NQ deferred compensation plan does not already provide for change in control payments, the provider may terminate the plan and distribute benefit payments to all affected employees. When the employees are going to continue working for the spinco, the most preferred process is to transfer the non-qualified plan obligation to the new employer but due to regulatory and legal issues (which are too lengthy to cover in this brief blog) that may or may not be the route taken.

As you can see, there are many issues in flux when it comes to the deferred compensation programs. Some of these you will have no control over but it is important for you to understand how these changes will occur, the net impact to you and how you move forward appropriately. These changes and any financial impact to you should be used as a component in your new contract negotiations.

Check back next week for part four in which we will be discussing retirement plan changes, including important tax strategies for your 401k and concepts that may be beneficial to your executive financial planning.

If you would like to privately discuss your personal executive compensation planning, including ways to potentially reduce risk or mitigate taxes, contact our team today.

Enjoy!

Tim Golas
Partner
Spurstone Executive Wealth Solutions

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

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