• Strategy
  • CFO.com | US

Scrambled Nest Eggs

Deferred-compensation legislation and likely rule changes in stock option accounting could shake up executive retirement plans.

In response to recent cases of senior executives “cooking the books,” federal legislators and finance regulators want to do some cooking of their own. What they’re looking at are ways to scramble the nest eggs of certain high earners.

Reports of executives also getting paid huge sums in the wake of alleged fraudulent schemes have irked investors and sparked legislative action. Mark Swartz, the former Tyco International CFO, recently looked to push his luck. Lawyers for the finance executive, who has been charged with pirating more than $600 million from the company, reportedly proposed using $5 million that he received from his deferred compensation plan to secure his $50 million bail bond. In the end, his family posted bail to keep Swartz out of jail while he awaits trial, but it’s the thought that counts.

Indeed, intiatives to curb excessive pay and make deferred compensation less attractive may have some unintended consequences that reach far beyond the Swartz’s of the world: Ideas kicking around Congress and the Financial Accounting Standards Board (FASB) could leave many law-abiding senior executives with less than they planned to have at retirement.

Hope’s not all lost, however. Certain strategies, some involving maneuvering within curbs on the sale of company stock, can help executives avert severe depletion of retirement funds with some added tax savings.

Consider a provision of H.R. 5095, a bill introduced last July, that could wreak havoc on existing non-qualified deferred compensation plans. Currently in widespread use by large corporations, such plans enable highly paid executives to pile tax savings on to the skimpy amount they can save under a 401(k). In a 401(k), after all, an employee can sock away only as much as $11,000 this year. In contrast, deferred compensation plans have no legislated contribution limit. The dollars are taxed when the employee has the right to get the benefits, which is typically at retirement.

The framers of the H.R. 5095 provision, however, want to change the taxation of non-qualified deferred compensation plans. The bill would make the plans taxable when employees contribute to the fund, rather than when they have the right to receive benefits. The proposal puzzles Bob Leeper, a managing director of Charon/ECA, a Newark, New Jersey-based consultancy for the design and implementation of benefit strategies.

Because it would make taxation immediate, the bill would unravel the plans’ essential purpose. “By definition there would be no deferral,” Leeper says of the bill’s potential ill effect. “The net result is that you wouldn’t see as much retirement savings.”

Although the bill hasn’t gotten very far in this session of Congress, the idea could crop up later if legislators are on the hunt for tax revenues. Such an initiative couldn’t come at a worse time for CFOs, many of whom are baby-boomers planning for retirement. Close to one-third (32 percent) of CFOs hope their next move will be retirement, according to a survey by RHI Management Resources. Released in July, the survey was based on responses from 1,400 CFOs of U.S. companies with more than 20 employees.


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