Designing Flexibility into a Deferred Compensation Plan
An executive participant in a non-qualified deferred compensation plan is a general unsecured creditor of the corporation. For this reason corporations that are not financially secure should not offer a non-qualified plan. However, corporations that are financially secure at plan implementation may weaken and the executives will develop a concern for the security of their money. Many companies adopt a "Rabbi Trust" to protect the deferred compensation funds from change of control or change of heart issues. However, a Rabbi Trust affords no bankruptcy protection.
Building flexibility into the plan design and giving executives the opportunity to withdraw their funds at a certain predetermined time reduces, but does not eliminate, the financial risk.
In the plan design that follows, executives are scheduled to get a full distribution from their account balance every fifth year. To avoid this distribution, the participant must notify the plan administrator thirteen (13) months in advance of the scheduled distribution date (IRC 409(A)) that he/she wants to elect against the distribution and defer payment at least another five years. Five years hence the process is repeated until the participant retires or elects to take the funds.
IRC 409(A) provides good guidance in support of this plan design structure.