Glossary of Terms  

Beneficiary: Any person or entity designated by the participant and entitled, according to applicable state law, to receive benefits payable upon or after the participant’s death pursuant to the terms of the plan.

Bonus: Any cash compensation earned by a participant for services rendered by a participant under any discretionary bonus plan or program maintained by the company or its affiliates.

Change in Control: The occurrence of a change in the ownership of the company, in effective control of the company, or in the ownership of a substantial portion of the company’s assets, within the meaning of U.S. Treasury Reg. § 1.409A-3(i)(5) or other guidance issued with respect to a change in control for purposes of Section 409A of the code.

COLI: Corporate-Owned Life Insurance (COLI) is a type of life insurance owned by the corporation either directly or via a Grantor Trust and insures the life of an employee. COLI policies are generally used by corporations to informally fund nonqualified executive benefit liabilities. COLI is a tax-favored asset that allows for tax-free growth of investment earnings, tax-free reallocation and tax-free distributions. All death proceeds received by the company, as beneficiary, are also received income-tax-free.

Based on several select benefit and compensation surveys, more than 70% of all nonqualified plans are informally funded with COLI or trust-owned life insurance (TOLI).

Company Contribution: The amount the company credits on behalf of any participant pursuant to the terms of the plan.

Compensation: Base salary, commission, 401(k) spillover, incentive and/or bonus payments as defined by the terms of a plan.

Deferral Election: An election by an eligible employee to defer base salary, bonus compensation, or any other form of compensation as determined by the Plan Administrative Committee. A participant must make a separate election with respect to base salary and bonus compensation.  A deferral election will only apply to compensation after applicable reductions for employee contributions, employee benefits, and FICA tax have been applied. A deferral election timely made by an eligible employee for a plan year will continue to be in effect for subsequent years plan years unless and until timely modified by the eligible employee in accordance with the plan document.

Deferred Compensation Plan (DCP): A deferred compensation plan is an agreement between an employer and an employee, in which a portion of the employee’s compensation (e.g., salary, bonus) is withheld (deferred) and paid out at a later date, such as retirement, termination of employment (also known as separation of service), or as a scheduled future distribution (e.g., 2032). The deferred amount is credited with a rate of return based on the participant’s investment options (e.g., market rate, fixed rate, etc.). Benefits are taxable to the participant once they are distributed based on their payout election.

Department of the Treasury: An executive department of the United States federal government that was established by an Act of Congress in 1789 to manage government. Responsibilities include producing currency and coinage, collecting taxes and paying bills of the U.S. government, managing the federal finances, supervising banks and thrifts, and advising on fiscal policy. The Department is administered by the Secretary of the Treasury, a member of the Cabinet. The Internal Revenue Service (IRS) is the largest bureau of the Department of the Treasury.

Eligible Employee: An employee who is selected by the Plan Administrative Committee to participate in the plan. Prior to the beginning of a plan year, the Plan Administrative Committee may change the group designation of any eligible employee.

Employee Retirement Income Security Act of 1974 (ERISA): A federal law that sets minimum standards, including participation, vesting, benefit accrual and funding, for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans. This law requires plans to provide participants with plan information including plan features and funding; provides fiduciary responsibilities for those who manage and control plan assets; requires plans to establish a grievance and appeals process for participants to get benefits from their plans, etc.

Evergreen: Refers to an election that is designed to be ongoing/self-renewing. These elections will continue to apply from year to year until you change or revoke it during the open enrollment period.

Federal Insurance Contribution Act (FICA): A federal law that created a payroll tax requiring a deduction from the paychecks of employees as well as a contribution from employers. Amounts withheld from compensation fund the Social Security program and Medicare.

Hardship Withdrawal: A severe financial hardship of the participant resulting from (a) an illness or accident of the participant, the participant participant’s spouse, the participant’s beneficiary, or the participant’s dependent; (b) a loss of the participant’s property due to casualty; or (c) such other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant, all as determined in the sole discretion of the Plan Administrative Committee.

Highly Compensated Employee (HCE): An employee whose compensation will total or exceed $155,000 in 2024. 

In-Service Distribution: A nonqualified deferred compensation payment made while you are still working for your company. These elections are typically for a specific year.

Internal Revenue Code (IRC): Domestic portion of federal statutory tax law in the United States, organized topically into subtitles and sections that cover income tax, payroll tax, estate tax, gift tax, and excise tax, as well as procedure and administration. Federal tax law begins with the IRC enacted by Congress in Title 26 of the United States Code (26 U.S.C.).

Internal Revenue Service (IRS): A bureau of the Department of Treasury that is tasked with the enforcement of income tax laws and oversees the collection of federal income taxes.

Investment Option: An investment fund, index, or vehicle selected by the Plan Administrative Committee and made available to participants for the deemed investment of their accounts.

Long Term Incentive Plans (LTIP): Long-term incentive plans are incentive-based plans that reward employees for reaching specific company goals.

Participant: An eligible employee who elects to participate in the plan by filing an election notice, and any former eligible employee who continues to be entitled to a benefit under the plan.

Performance-Based Compensation: A bonus based on predefined performance metrics of the company, department or individual covering a period of no less than 12 months.

Plan Administrative Committee: Person or persons appointed by the company to administer the plan, usually members of the human resources or compensation department.

Plan Documentation: A legal document that is required to establish a nonqualified deferred compensation plan. The plan provisions are outlined and include deferral types, eligible group, payout options and deferral elections. 

Plan Funding: Plan Funding refers to a company setting aside assets to “informally” fund for employee benefit obligations. The plan funding can be either taxable or nontaxable securities. For most companies that are taxpayers, COLI is the preferred asset for plan funding. This allows a company to eliminate the taxes on investment gains and acquire other tax and cost benefits associated with the use of COLI (nontaxable securities).

Plan Year: A 12-month period designated by a retirement plan for calculating vesting and eligibility, among other things; the plan year can be the calendar year or an alternative period.

Rabbi Trust: Is a grantor trust used to secure plan benefits for participants in a nonqualified plan (e.g., deferred compensation plans). The dollars held in trust are protected from a corporate change in control (merger or acquisition) or a corporate change of heart. The benefits are also protected in the event the company does not have the financial ability to pay benefits (i.e., lacking cash flow). The dollars held in the trust can only be used to pay plan benefits and cannot be used for any other corporate purpose. Rabbi trusts do not protect against corporate insolvency.

Retirement: Separation of service or at a specific retirement age (e.g., 65), whichever is last.

Salary: The annual rate of base pay paid by the company or its affiliates to or for the benefit of the participant for services rendered.

Separation of Service: The date that an employee’s service to the company is terminated or meets the Treasury’s facts and circumstances test.

SERP (Supplemental Executive Retirement Plan): A nonqualified benefit which provides participants a stream of income at retirement. Like deferred compensation, a SERP is an unsecured promise by the employer to provide a retirement benefit to the executive. Most SERP plans provide a percentage of final compensation as a retirement benefit based on age, years of service and compensation at the time of retirement. SERPs can also be designed to provide a fixed level of income to a participant at some later date or it can even be designed as an incentive or performance-based benefit.

Short-Term Deferred Compensation Plan (STDCP): This is a deferred compensation that is not a Top Hat Plan subject to IRC 409A. This plan does allow highly compensated employees that are beyond the highest 15% of wage earnings and non-highly compensated employees to defer income above and beyond 401(k) plan limits. All dollars deferred must be paid out no longer than 10 years from the time of deferral.

Specified Date: A type of payout election that is made in conjunction with deferral elections during enrollment. This payout option tends to offer the most flexibility, as participants are able to elect specific future dates to receive distribution(s) from the plan, even while still employed with the sponsoring company. Company plans may have specific minimum timeline requirements.

Specified Employee: A key employee as defined in the qualified plan top-heavy rules. Under those rules, a key employee is an employee who, at any time during the plan year, is (i) an officer of the employer with an annual compensation greater than $185,000, (ii) a 5% owner of the employer, or (iii) a 1% owner of the employer with an annual compensation from the employer of more than $150,000. For purposes of the clause (i), no more than 50 employees (or, if lesser, the greater of 3 or 10% of all employees) shall be treated as officers. Whether a person is an officer will be determined based upon the facts and circumstances, a person with the duties and authority of an officer will be treated as an officer, even if he or she does not have that authority title, and persons of like positions in organizations other than a corporation will be treated as officer for this purpose. Section 409A Treasury regulations specify use of the general definition of compensation under Section 415, disregarding special timing rules and other elections.

Split Dollar: A Split-Dollar Plan is an arrangement between an employer and an employee, where the employer and employee share the costs and benefits of a permanent life insurance policy. For example, the employer pays a portion of the premium, and the employee pays the remaining premium. Then, the death benefit of the policy is split between the employer and the employee, with the employee’s beneficiaries receiving the portion of the death benefit that exceeds the total premium payments made by the employer.

The split of the death benefit and/or cash surrender value is typically agreed upon in advance and outlined in the split-dollar plan agreement. This arrangement can be used as a form of executive compensation and can provide tax benefits to both the employer and the employee.

Survivor Benefit: Survivor benefits are typically designed to be equal to and executive’s deferred compensation account balance. Occasionally, an enhanced survivor benefit will be delivered (assuming that the corporation is using COLI for funding purposes) which can be defined, for example, as the greater of 40% of an executive’s cumulative deferrals paid for 10 years discounted at 9% or their account balance.

An easier approach that gets the same figure is to define the survivor benefit as the greater of 2.5 times an executive’s cumulative deferrals or their account balance.

All survivor benefits are paid directly by the corporation and considered taxable income to the executive’s beneficiaries and deductible by the corporation upon payout.

The executive’s elections regarding his or her beneficiary and the form and timing of his or her survivor benefits may generally be changed at any time prior to death.

Taxable Securities: Marketable securities including equities and fixed income securities that are acquired by a company. All earnings on these assets are subject to income tax. A common form of taxable securities are mutual funds.

Unforeseeable Emergency:  A severe financial hardship of the participant resulting from (a) an illness or accident of the participant, the participant participant’s spouse, the participant’s beneficiary, or the participant’s dependent; (b) a loss of the participant’s property due to casualty; or (c) such other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant, all as determined in the sole discretion of the Plan Administrative Committee.

Vesting: A legal term that is commonly used in the context of retirement plans, employee stock option plans, and other employer-provided benefits. It refers to the process by which an employee earns the right to receive certain benefits from their employer over time.

Voluntary Deferrals: An employer-sponsored retirement plan contribution arrangement under which participants can choose to set aside part of their pretax compensation (e.g., salary and/or bonus) determined to be eligible for deferral according to the designation by the Plan Administrative Committee and elected by the participant during an eligible period for election as determined by the plan.

Withdrawal: The act of taking out money from the policy’s cash value. It’s often considered a “partial surrender” of the policy because you’re reducing the cash value and possibly the death benefit of the policy, depending on the terms and conditions of the policy.