Restorative Benefits and Equity-Based Performance Plans for "Carve-Out" Retirement Plans Can Help Those Whose Benefits May Otherwise Be Limited by IRS Requirements That Benefits Be Nondiscriminatory

EXECUTIVE SUMMARY * As the employment market and the economy both improve, the competition for the best increases. * Many of the employee benefit rules intended to prevent discrimination in compensation limit the ability to provide adequate retirement and other for executives. * Carve-out benefit plans permit employers to compensate their executives sufficiently to avoid losing them to other companies. These plans can be equity-based or nonequity-based, although many executives prefer not having the volatility and uncertainty of an equity-based plan. * One way to compensate these executives involves setting up a supplemental executive retirement plan (SERP), a plan for executives that is funded entirely by the company and is usually not equity-based. ********** [ILLUSTRATION OMITTED] As the U.S. economy continues to work its way back from the recession and the jobs market gradually improves, companies should review their executive compensation arrangements, both in recruiting new hires and in keeping key executives from being lured to competitors. In addition, the loss of financial security experienced by many Americans from the recession may affect an employee's decision to retire or to work significantly longer to shore up retirement savings. This dilemma is highlighted further in the executive ranks because of the limitations under IRS rules governing participation in retirement and other deferred compensation plans by highly compensated employees (referred to as executives in this article). According to the Congressional Research Service, the Code provisions under ERISA Title II require plans to cover rank-and-file workers, and they include 'nondiscrimination rules' that prohibit qualified plans from favoring highly-compensated with respect to eligibility or benefits (Summary of the Employee Retirement Income Security Act, p. 56 (tinyurl.com/ct2xvwg)). While these non discrimination rules ensure that qualified plans do not discriminate against rank-and-file workers, in many cases they result in significant reductions of for executives. Example. Manufacturing Co. Inc. (MC), the American subsidiary of a Japanese company, produces sophisticated circuit board components used in many of today's leading tablet and cellphone platforms and employs nearly 1,500 people. MC offers the following employee benefits: group health insurance coverage, group life insurance, group short-term and long-term disability benefits, and a company matching contribution on employee pretax contributions equal to 50% of the first 3% of compensation contributed to the company's 401(k) plan. Rank-and-file make up 95% of the workforce, and MC has approximately 80 executives based in Georgia as well as in sales offices throughout the United States. The executives do not have any equity-based compensation plans or additional pretax saving vehicles to supplement their retirement savings. Within MC's employee benefit offerings, the following benefit limits are in place: * Group life insurance: two times compensation to a maximum of $250,000 death benefit. * Group long-term disability insurance: 60% of base salary to a maximum monthly benefit of $10,000. * 401(k) contributions: Because of the limited participation of rank-and-file in the 401(k) plan, the executives are limited to an annual pretax contribution of $4,500 to the plan (the 2012 IRS limit on employee pretax contributions under Sec. 402(g) is $17,000, plus $5,500 in catch-up contributions for those over 50). Approximately 50 MC executives are having their capped because their total compensation exceeds the levels for which are available. Chief of Electronics John Doe provides an illustrative case study. John has a base salary of $175,000 and is on track to earn a performance bonus of $75,000. …