by JACK MACY Partner, Chicago Office
Presented before the Ninth Annual Tax Conference of the Illinois Society of Certified Public Accountants, Chicago—December 1963
UNDER existing tax laws, simple compensation payable currently in cash and fully taxable can rarely be adequate to permit an employee, particularly at the executive level, to provide for his retirement
as well as for his current requirements. For the employee to receive advantageous treatment and for the employer to obtain and keep capable executives, it is usually necessary to devise other compensation
Perhaps the commonest of these techniques is the qualified pension
or profit-sharing plan. Such plans have the benefit of current deductions for the employer with deferral of the employee's tax. Consequently, the possibility of using this type of plan should be carefully considered.
However, qualified plans have limitations, particularly with respect
to the contributions that may be made on behalf of the higher-paid employees. Additional, more flexible plans may therefore be desirable even though they do not qualify.
FUNDING NON-QUALIFIED DEFERRED COMPENSATION
Ordinarily, any plan of deferred compensation that does not constitute a qualified plan should not be funded. The reason is that funding may result in adverse tax consequences.
If the rights of the employee are nonforfeitable at the time payments
are made into nonqualified plans, the employee is immediately taxable. Thus, he not only receives no tax advantage but will be confronted with the necessity of raising the funds to pay taxes on money that he has not received.
If the employee's rights are forfeitable when the employer's payments
are made, the employee will generally not be taxed until he receives benefits. In this case, the principal adverse tax consequences pertain to the employer. The employer will not be entitled to any deduction at the time of contribution where the employee's rights are forfeitable at that time. It is the Treasury position that no deduction
can be claimed in a subsequent year when payments are made to the employee. The basis of this position is that there is no accrual in a subsequent year.