We are beginning a series of articles on executive compensation with a glossary of common terms that we will use throughout the articles. The terms will also be available at www.acredula.com and www.bricker.com.

Nothing contained herein in these materials or any presentation thereof is intended, or should be relied upon, as legal advice or representation.

451 plan is a non-qualified deferred compensation arrangement for employees of taxable employers. Deferrals under a 451 plan are includible in gross income for federal income tax purposes when and as paid to or made available to the employee or beneficiary. Reference: IRC § 451; Treas Regs §§ 1.451-1 and 1.451-2. As with other non-qualified plans, the deferrals are includible in gross income for purpose of Social Security, Medicare and other FICA and FUTA employment taxes due when and as the services are performed or there is no substantial risk of forfeiture. Reference: IRC § 3121(v)(2); Treas Regs § 3121(v)(2)-1.

457(b) plan or an “eligible 457 plan” is a non-qualified deferred compensation arrangement for employees of tax-exempt and government employers pursuant to which deferrals are includible in gross income for federal income tax purposes when and as paid or made available to the employee or beneficiary. Reference: IRC § 457(b); Treas Regs §§ 1.457-1 through 1.457-12. As with other non-qualified plans, the deferrals are includible in gross income for purpose of Social Security, Medicare and other FICA and FUTA employment taxes due when and as the services are performed or there is no substantial risk of forfeiture. Reference: IRC § 3121(v)(2); Treas Regs § 3121(v)(2)-1.

457(f) plan or an ineligible 457 plan is a non-qualified deferred compensation arrangement for employees of tax-exempt and government organizations pursuant to which deferrals are includible in gross income for federal income tax purposes when and as there is no substantial risk of forfeiture. Reference: IRC § 457(f); Treas Regs. § 1.457-7. As with other non-qualified plans, the deferrals are includible in gross income for purpose of Social Security, Medicare and other FICA and FUTA employment taxes due when and as the services are performed or there is no substantial risk of forfeiture. Reference: IRC § 3121(v)(2); Treas Regs § 3121(v)(2)-1.

Account balance plan is, for federal employment tax purposes, a nonqualified deferred compensation arrangement under the terms of which a principal amount is credited to an individual account for an employee, and income, expenses, gains and losses from the investment of the account are also credited or debited, and the benefits payable to the employee are based solely on the balance credited to the individual account. Reference: IRC § 3121(v)(2); Treas Regs § 3121(v)(2)-1(c)(1)(ii)(A). See also “defined contribution plan” and “individual account plan.”

Appreciation right entitles a service provider to receive the appreciation with respect to a designated number of shares of stock. An appreciation right may be granted: (i) in tandem with an option entitling the service provider upon exercise of the appreciation right to surrender the option and receive the appreciation of the shares of stock purchasable upon exercise of the option or (ii) on a standalone basis entitling the service provider upon exercise of the appreciation right to receive the appreciation of a number of shares of stock designated in the appreciation right. Upon exercise of the appreciation right, the appreciation is generally paid in shares of stock equal in number to the quotient resulting from dividing the appreciation by the fair market value or other value of a share of stock at the date of exercise or, if the appreciation right so provides, in cash or any combination of cash or such shares. Appreciation is typically measured from a starting price or base value, generally referred to for federal income tax purposes as the “exercise price.” An appreciation right may be issued on a standalone basis or in tandem with an option. See also “exercise price” and “option.”

Annual bonus plan is an arrangement providing a bonus for service over a period not exceeding one year. See also “bonus” and “long-term incentive plan.”

Balanced scorecard evaluation is a multiple perspective performance evaluation first advocated by authors Robert Kaplan and David Norton to balance measures of a financial perspective with those of non-financial perspectives. The non-financial measures typically include measures of improvement in customer relations, learning and growth, and internal operating processes. It is commonly used as the performance measures for long-term incentive plans. See “long-term incentive plans.” Bonus is typically an additional to base compensation for service over a period, typically annual, that is at the discretion of the employer or based upon performance or length-of-service. See also “long-term incentive plan.”

Cash balance plan is an arrangement having characteristics of a defined contribution plan that is intended to constitute a defined benefit plan. Typically, the employee is credited with a pay credit, such as a percent of his or her compensation over the years of participation or other period, and an interest credit based upon a fixed or variable rate (often an index rate such as the 1-year Treasury bill rate) on the pay credits over the same period. There is a hypothetical accounting of the credits, and the benefit to the employee is the accounted value of the credits at the date of payment. As with other defined benefit plans, the employer bears the investment risk. See also “defined benefit plan,” “defined contribution plan,” “target benefit plan” and “qualified plan.”

Compensation means all forms of cash and non-cash payments or benefits provided in exchange for services, including salary and wages, bonuses, severance payments, deferred payments, retirement benefits, fringe benefits and other financial arrangements or transactions such as personal vehicles, meals, housing, personal and family educational benefits, below-market loans, payment of personal or family travel, entertainment and personal use of the organization’s property. Reference: IRS Form 990 Instructions, Glossary.

Deferred compensation, for federal income tax purposes, is compensation that is or, for any reason or no reason, can be paid in a year that is later than the year in which the services are performed or for which the compensation is earned or accrued, regardless of whether or not it is funded, vested or subject to a substantial risk of forfeiture. Under IRC § 409A, a deferral of compensation occurs if, under the relevant facts and circumstances, a service provider has a legally binding right during a taxable year to compensation that is or may be payable to (or on behalf of) the service provider in a later taxable year. Reference: IRC § 409A; Treas Regs § 1.409A-1(b)(1). See also “legally binding right.”

Defined benefit plan, under the IRC and ERISA, is any retirement or other deferred compensation arrangement that is not a defined contribution plan. Reference: IRC § 414(j); ERISA § 3(b)(35). More practically, it is a plan which defines the benefit, occasionally a fixed dollar amount or more frequently an amount based upon an employee’s compensation or a combination of compensation and years of service, and for which the employer bears the investment risk. Typically it is a qualified plan. See also “cash balance plan,” “defined contribution plan,” “target benefit plan” and “qualified plan.”

Defined contribution plan is a retirement or other deferred compensation arrangement that provides for (i) an individual account for each participant and (ii) benefits based solely on the amount contributed to the participant’s account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant’s account. Reference: IRC § 414(i); ERISA § 3(b)(34). More practically, it is a plan for which the employee or participant bears the investment risk. Typically it is a qualified plan. See also “account balance plan,” “individual account plan, “cash balance plan,” “defined benefit plan,” “target benefit plan” and “qualified plan.”

Employee is an individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee. For federal income tax purposes, an employee is any individual who is treated as an employee for federal employment tax purposes under IRC § 3121(d). Reference: IRC § 3121; ERISA § 3(b)(6).

Equity compensation plan is typically an arrangement that involves a transfer of property in consideration for services that is subject to IRC § 83, such as a share of stock or a unit of a security or ownership interest of an entity, or an option or other right to acquire any such stock or other security or ownership interest. See also “phantom stock plan” and “shadow equity plan.”

ERISA is the Employee Income Security Act of 1974, as amended. Reference: 29 USC 1001 et seq.

ESOP is an arrangement, typically in the form of an individual account plan that is a qualified plan, in which shares of stock or units of a security of the employer or entity affiliated with the employer are allocated to the service provider’s account. The service provider’s rights to the account generally vest pursuant to service vesting or performance vesting. See also “defined contribution plan,” “qualified plan,” and “stock bonus plan.”

Exercise price means, with respect to any option, appreciation right or other form of equity compensation, the price paid, typically in terms of cash or other property (including shares of stock or units of a security), or reported for federal income taxation to have been paid by the service provider to whom the compensation is issued or other beneficiary receiving the benefit of the compensation. With respect to an option, it is typically the price stated in the arrangement or instrument evidencing the option price at which the option entitles the service provider or beneficiary to purchase a share of stock or unit of a security upon exercise of the option. With respect to an appreciation right, it is the price per share or value per unit that is to be exceeded in determining appreciation, typically referred to as the “starting price” or “base value.” To avoid non-qualified options from resulting in deferrals of compensation under IRC § 409A, the exercise price may never be less than the fair market value of the underlying stock or other security and the number of shares or other units subject to the option must be fixed on the original date of grant of the option. Reference: Treas Regs § 1.409A-1(b)(5). See also “appreciation right” and “option.”

Excess benefit plan is, for purpose of ERISA, a retirement or other deferred compensation arrangement that provides non-qualified deferred compensation to higher-paid employees to restore qualified plan benefits to which they are not entitled because of the limitations on contributions and benefits imposed by IRC § 415. Such an unfunded excess benefit plan is not subject to ERISA. Reference: ERISA 3(b)(36).

Incentive compensation is compensation in addition to base compensation as incentive for satisfying or exceeding pre-established length-of-service or performance measures. The performance measures can be based upon the performance of the service provider, a group including the service provider, or a business segment for which the service provider provides services (which may include the entire organization). See also “balanced scorecard evaluation,” “bonus,” “long-term incentive plan” and “performance-based compensation.”

Individual account plan is another term for a defined contribution plan. See “defined contribution plan.”

Involuntary separation is a separation from service due to the independent exercise of the unilateral authority of the employer to terminate the service provider’s services, other than due to the service provider’s implicit or explicit request. Typically in employment arrangements, voluntary separation by a service provider is treated as an involuntary separation if it is for good reason. Treas Regs under IRC § 409A provide a safe harbor involving the following good reasons: (i) Material diminution in base compensation; (ii) material diminution in the service provider’s authority, duties, or responsibilities; (iii) material diminution in the authority, duties, or responsibilities of the supervisor to whom the service provider is required to report, including a requirement that a service provider report to a corporate officer or employee instead of reporting directly to the governing body; (iv) material diminution in the budget over which the service provider retains authority; (v) material change in the geographic location at which the service provider must perform the services; and (vi) any other action or inaction that constitutes a material breach by the employer of the agreement under which the service provider provides services. Reference: Treas Regs 1.409A-1(n).

Legally binding right to compensation is the inception point of inclusion in income under IRC § 409A. A legally binding right includes a contractual right that is enforceable under the applicable law or laws governing the contract. Although not defined in § 409A, the discussion under heading III B of the preliminary text of the release containing the final 409A Treas Regs states that “[a] legally binding right also includes an enforceable right created under other applicable law, such as a statute.” However, there is no legally binding right to the extent that compensation may be reduced unilaterally or eliminated by the service recipient. Reference: IRC § 409A; Treas Regs § 1.409A-1(b)(1).

Long-term incentive plan or LTIP is an arrangement providing incentive pay for satisfying or exceeding pre-established performance measures over a performance period of two or more years. See also “incentive compensation” and “annual bonus plan.” Performance measures are more frequently including measures of non-financial perspectives included in a balanced scorecard evaluation. See also “balanced evaluation.”

Money-purchase pension plan is an arrangement, typically in the form of a defined contribution and individual account plan that is a qualified plan, to which contributions are required to be made by the employer for each period of service completed by the participant. In contrast, contributions to a profit-sharing plan are not required unless the employer or applicable affiliate of the employer has profits for the applicable period. The service provider’s rights to the account generally vest pursuant to service vesting or performance vesting. Treas Regs § 1.401-1(b)(1)(i). See also “defined contribution plan,” “qualified plan,” and “profit-sharing plan.”

Non-qualified deferred compensation generally is compensation received under an arrangement other than one of the following considered to be “qualified plans” which are plans governed by IRC §§ 401(a), 403(a), 403(b), 408(k), 408(p), 415(m) or 501(c)(18). For federal income taxes, the benefit is not includible in the employees gross income until it is paid or made available for receipt, except that for employees of tax-exempt and government organizations, it is includible in gross income when and as it vests or there is not a substantial risk of forfeiture. Reference: IRC §§ 451, and 457(f). For Social Security, Medicare and other FICA and FUTA employment taxes, benefits are includible in the employee’s gross income when and as the services are performed or there is no substantial risk of forfeiture. Reference: IRC § 3121(v)(2). See also “451 plan,” “457(b) plan,” and “457(f) plan.”

Non-qualified stock option is an option or other right to purchase a share of stock or unit of a security or ownership interest of an entity that does not qualify as an incentive stock option under IRC § 422 or an employee stock purchase plan under IRC § 423. A non-qualified stock option is typically governed by IRC § 83. Reference: Treas Regs § 1.83-7. See also “option,” “qualified stock option” and “stock option plan.”

Option is a right to purchase a share of stock or unit of a security or ownership interest of an entity. The exercise of the option, or the right to retain the share or unit acquired upon exercise, may be subject to a service vesting schedule, performance vesting schedule, or other restrictions. An option may be either a non-qualified stock option or a qualified stock option. See “equity compensation plan,” “non-qualified stock option,” “qualified stock option” and “stock option plan.”

Performance-based compensation is compensation that is conditioned upon attainment of some performance criteria. The performance criteria may be based upon performance of the service provider, of a group including the service provider, or of a business segment for which the service provider provides services (which may include the entire organization). Treas Regs under IRC § 409A provide a special period for electing to defer performance-based compensation that is based upon either (i) pre-established performance criteria over a performance period of at least 12-consecutive months or (ii) subject performance criteria that is determined by someone other than the service provider, a family member of the service provider or someone under effective control of the service provider. The special period is the period ending six months before the end of the performance period but in no event before the compensation becomes readily ascertainable. Reference: Treas Regs §§ 1.409A-1(e)(1) and (2) and § 1.409A-2(a)(8). See also “balanced scorecard evaluation,” “bonus” and “incentive compensation.”

Performance vesting or performance vesting schedule is vesting of service provider’s right to receive a benefit that is conditioned on the attainment of some performance criteria. The performance criteria may be performance of the service provider, of a group including the service provider, or of a business segment for which the service provider provides services. See also “performance-based compensation” and “service vesting.”

Permissible payments means, with respect to IRC § 409A, payments by reason of (i) separation from service; (ii) becoming disabled; (iii) death; (iv) a time or fixed schedule that is specifically identified, or is determined by an objective, nondiscretionary formula specified, prior to the employee having any legally binding right; (v) change in ownership or effective control or in ownership of a substantial portion of assets; or (vi) occurrence of an unforeseeable emergency. Reference: Treas Regs § 1.409A-3(a).

Phantom stock plan or phantom equity plan is typically an arrangement providing a service provider a payment or other benefit that is based upon, or measured by, the share value of stock or unit value of another security or ownership interest of an entity, but not involving a transfer of property subject to IRC § 83. The share or unit value may be based upon market price of a unit, or a formula such as capitalized earnings per unit, or appraisal such as fair market value of a unit of ownership. Because it is based upon value of a unit of ownership, factors such as control premiums and discounts for lack of marketability are typically taken into account. Typically, a phantom stock plan is a promise to pay money that is not secured or funded by stock or other security or ownership interest or other property. See also “equity compensation plan” and “shadow equity plan.”

Profit-sharing plan is an arrangement, typically in the form of a defined contribution and individual account plan that is a qualified plan to which contributions for any period are contingent upon profits of the employer or an entity affiliated with the employer for the period. In contrast, a money-purchase plan requires contributions typically regardless of the profits or results of operation of the employer. The service provider’s rights to the account generally vest pursuant to service vesting or performance vesting. Reference: Treas Regs § 1.401-1(b)(1)(ii). See also “defined contribution plan,” “qualified plan,” and “money-purchase pension plan.”

Qualified plan generally is a retirement or other deferred compensation arrangement that, pursuant to the tax laws, a benefit is not included in the employee’s gross income for federal income and employment taxes until it is paid, and the employer is entitled to a deduction from gross income in determining its federal income taxes for the amount contributed each year to fund those benefits. Typically, qualified plans are governed by IRC §§ 401(a), 403(a), 403(b), 408(k), 408(p), 415(m) or 501(c)(18).

Qualified stock option is an option or other right to purchase a share of stock or a unit of a security or ownership interest of an entity that qualifies as an incentive stock option under IRC § 422. See also “equity compensation plan,” “non-qualified stock option,” “option” and “stock option plan.”

Rabbi trust is a grantor trust used in connection with unfunded deferred compensation arrangements so that an employee will not be in constructive receipt of income or incur an economic benefit solely on account of the assets securing payment of the deferred compensation are transferred to and held in the name of a trustee pursuant to the trust. Rules of constructive receipt require that (i) an employee’s rights to payment of any deferred compensation may be no greater than those of general unsecured creditors of the employer; (ii) the obligation of the employer to pay the deferred compensation may constitute no more than a mere promise to the payments in the future; and (iii) the employee’s rights to payment may not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment by creditors of the employee or his or her beneficiary. Assets in a Rabbi trust are held in the name of a trustee and not in the name of the employer or employee. The assets are held for the exclusive purpose of securing the employer’s obligation to make payments to the employees or their beneficiaries except in the case of insolvency of the employer. In the case of insolvency, the assets of the trust will become subject to the claims of employer’s general creditors under federal and state law. If the trustee becomes aware of the employer’s insolvency, the trustee is required to discontinue payments to employees or their beneficiaries and is required to hold the assets of the trust for the benefit of employer’s general creditors. Because the Rabbi trust is a grantor trust, all income of the trust and items of deduction against that income or credit against any taxes on that income are passed through to the employer pursuant to the grantor trust rules. The Department of Labor has ruled that a Rabbi trust constitutes an unfunded arrangement for purpose of the top-hat plan exemption from ERISA. References: IRC §§ 402(b); 83, and 671; Rev Procs 92-64, 92-65, and 96-64.

Restricted Stock is stock subject to any service vesting schedule, performance vesting schedule or other restriction imposed on the right of a holder to offer for sale, sell, pledge, assign, encumber or otherwise transfer or dispose of stock or any interest in such stock. Typically, each share granted as or issued restricted stock entitles the record holder thereof to all rights and incidents of ownership thereof, including all dividend and voting rights, provided, however, that no such share shall entitle any person to offer for sale, sell, pledge, assign, encumber or otherwise transfer or dispose of such share or any interest in such share until satisfaction of all such restrictions imposed by arrangement or instrument evidencing the Award of the stock.

Retention bonus or retention plan is an arrangement providing a service recipient with a bonus or other additional compensation for completing a period of service. It is similar to a signing bonus or plan, but is typically to retain someone as, rather than to attract someone to become, a service provider. The bonus or arrangement is typically subject to IRC § 409A unless it is designed to fall within the short-term deferral exception from § 409A. See also “short-term deferral exception from § 409A” and “signing bonus.”

Risk of forfeiture is a risk that a service provider’s or beneficiary’s right to receive payment of compensation may be terminated or forfeited, or otherwise not be enforceable, pursuant to the contractual terms or by operation of law to which such the compensation is subject. See also “Substantial risk of forfeiture.”

Salary is part of the base compensation that is payable in a fixed, gross amount or rate for service over a period (other than hourly), typically at regular payroll intervals.

Separation pay plan exception from § 409A excludes from being subject to IRC § 409A an arrangement that provides for payment only (i) upon an involuntary separation from service or pursuant to a window program; (ii) the pay does not exceed two times the lesser of (A) the service provider’s annualized rate of compensation or (B) the maximum amount that may be taken into account under a qualified plan pursuant to IRC § 401(a)(17); and (iii) the plan provides that the pay must be paid no later than the last day of the second taxable year of the service provided following the taxable year in which the separation occurs. Reference: IRC § 409A; Treas Regs § 1.409A-1(b)(9)(iii). See also “severance plan.”

Service vesting or service vesting schedule is vesting of service provider’s right to receive a benefit that is conditioned on the length of service provider’s service with an employer. The vesting may be a cliff vesting such as 100 percent vesting after completion of a designated period (typically months or years) of service, or scheduled vesting, such as a percentage of benefit after each of consecutive periods (typically months or years) of service. See also “performance vesting.”

Severance plan is an arrangement providing benefits, including pay, upon an employee’s severance or separation from service. For such an arrangement to be excluded from being subject to ERISA, (i) the arrangement must not provide for payment on account of retirement, (ii) the total amount of such payments must not exceed twice the employee’s annual compensation during the year immediately preceding the termination of service, and (iii) the payment must be completed within 24 months after the termination of service. Reference: ERISA § 3(b)(2); DOL Regs § 2510.3-2(b). IRC § 409A generally includes as possible deferrals of compensation subject to § 409A any payment, reimbursement of expenses or benefit (including in-kind benefits) that are made because the service provider has had a separation from service. Reference: Treas Regs § 1.409A-1(b) and (m). See also “separation pay plan exception from 409A” and “separation pay plan.”

Shadow equity plan is typically an arrangement providing to a service provider a payment or other benefit that is based upon, or measured by, the value of an entity, but not involving a transfer of property subject to IRC § 83. The entity value may be based upon the entity’s book or net asset value, or present value of the entity’s anticipated earnings or cash-flow, or the aggregate market value of its capital, or the anticipated value to the entity’s shareholder or ownership upon the entity’s dissolution. Because it does not involve value of a unit of ownership, shadow equity plans typically do not take into account factors such as control premiums and discounts for lack of marketability. Typically, a shadow equity plan is a promise to pay money that is not secured or funded by stock or other security or ownership interest or other property. See also “equity compensation plan” and “phantom stock plan.”

Short-term deferral exception from § 409A is one of the principal provisions under § 409A Treas Regs that excludes from § 409A any payment required to be made or completed on or before the last date of the 2-1/2-month period after the end of the service provider’s taxable year or the service recipient’s taxable year in which the right to payment is no longer subject to a substantial risk of forfeiture. Accordingly, § 409A can be avoided if (i) the payment provides that payment is to be made or completed by no later than March 15 (or the applicable 2-1/2-month date) following the year in which the service provider first has a legally binding right to the payment or, if later, that right is no longer subject to a substantial risk of forfeiture and (ii) the service provider actually or constructively receives such payment before March 15 (or the applicable 2-1/2-month date). If the payment arrangement provides that payment is to be made or completed by the applicable 2-1/2-month date, but the payment cannot be made because of an administrative impracticability, the payment still qualifies as a short-term deferral if it is made as soon as administratively practicable. Reference: Treas Regs § 1.409A-(b)(4). See also “legally binding right” and “substantial risk of forfeiture.”

Signing bonus or signing-bonus plan is an arrangement providing a candidate with a bonus or other additional compensation if he or she becomes a service provider. It is similar to a retention bonus or plan, but is typically to attract someone to become, rather than retain someone as, a service provider. The bonus or arrangement is typically subject to IRC § 409A unless it is designed to fall within the short-term deferral exception from § 409A. See also “short-term deferral exception from § 409A” and “retention bonus.”

Stock bonus plan is an arrangement, typically in the form of a defined contribution and individual account plan that is a qualified plan, in which shares of stock or units of a security are allocated to the service provider’s account. The service provider’s rights to the account generally vest pursuant to service vesting or performance vesting. Unlike an ESOP, a stock bonus plan is not limited to shares of stock or units of a security of the employer or an entity affiliated with the employer. Many stock bonus plans are in the form of a profit-sharing plan. Reference: Treas Regs § 1.401-1(b)(1)(iii). See also “defined contribution plan,” “qualified plan,” “ESOP,” and “profit-sharing plan.”

Stock option plan is another term for a equity compensation plan. See “equity compensation plan.” Stock options that meet the requirements of IRC qualify as incentive stock options under IRC § 422 or employee stock purchase plans under IRC § 423 are considered “qualified stock options.” All other options or rights to purchase securities or ownership interest granted in exchange for services are considered “non-qualified stock options” subject to IRC § 83. Reference: IRC $§ 83 and 421 – 423 and Treas Regs. § 1.83-7.

Substantial risk of forfeiture is a risk of forfeiture for which the possibility of forfeiture is substantial based upon the relevant facts and circumstances. The term has different meanings under different provisions of the IRC. IRC § 409A requires for a risk to be substantial that it must be (i) conditioned on the performance of substantial future services and (ii) the possibility of forfeiture is substantial and that a risk of forfeiture does not exist merely because of covenants not to compete and other similar restrictions upon the refraining from the performance of services. IRC § 83 and 457(f) have a similar concept of what constitutes a substantial risk of forfeiture, but whether restrictive covenants constitute a substantial risk will be based upon the particular facts and circumstances of each case. Under IRC §§ 83 and 457(f), factors which may be taken into account in determining whether a covenant not to compete constitutes a substantial risk of forfeiture are the age of the employee, the availability of alternative employment opportunities, the likelihood of the employee’s obtaining such other employment, the degree of skill possessed by the employee, the employee’s health, and the practice (if any) of the employer to enforce such covenants. Similarly, rights in property transferred to a retiring employee subject to the sole requirement that it be returned unless he renders consulting services upon the request of his former employer will not be considered subject to a substantial risk of forfeiture unless he is in fact expected to perform substantial services. Reference: IRC §§ 83(c)(1), 457(f)(3)(B), 409A(d)(4); Treas Regs § 1.83-3(c) and § 1.409A-1(d).

Supplemental executive retirement plan, supplemental executive retention plan, or SERP is an arrangement providing retirement or retention benefits to supplement the basic compensation and retirement benefits to which the employee is otherwise entitled. The arrangement is typically a non-qualified deferred compensation plan, but may consist of current compensation, an excess benefit plan or other form of benefits.

Target benefit plan is a retirement or other deferred compensation arrangement having characteristics of a defined benefit plan that is intended to constitute a defined contribution plan. Typically, the plan defines a target benefit upon reaching retirement age, and then defines a contribution that, using actuarial assumptions (such as interest rates, mortality, employee turnover) determined pursuant to the plan, is projected to result in that target benefit at the payment date. The contributions are credited to an individual account for the employee and the account is also credited or debited with the actual (not the assumed) income, expenses, gains and losses from the investment of the account.

As with other defined contribution plans, the employee’s benefit is the account value at the date of payment, and the employee bears the investment risk. See also “cash balance plan,” “defined benefit plan,” “defined contribution plan,” “target benefit plan” and “qualified plan.”

Tax gross-up is a payment of compensation, or a gross-up of the gross income reported, to a service provider to reimburse him or her for either some or all of the taxes paid with respect to deferrals includible in his or her gross income for taxable years prior to the year of payment of the deferral. A full gross-up reimburses the service provider in an amount equal to all of the federal, state, local or foreign taxes imposed upon the service provider as a result of deferred compensation includible in the service provider’s gross income, including the amount of additional taxes imposed upon the service provider due to the service recipient’s payment of the initial taxes on such deferred compensation so that the resulting taxable income to the employee for the taxable year will be equal the net amount that would have been retained by the employee without taking into account either the deferred compensation or the gross-up payment. Treas Regs under IRC § 409A permits a plan subject to Code § 457(f) to accelerate payment of deferred compensation on a limited basis to pay federal, state, local and foreign income taxes due upon a vesting event, provided that the amount of such payment is not more than an amount equal to the federal, state, local and foreign income tax withholding that would have been remitted by the employer if there had been a payment of wages equal to the income includible by the service provider under section 457(f). Reference: Treas Regs § 1.409A-3(j)(4)(iv).

Top-hat plan exemption excludes from the participation and vesting, funding and fiduciary responsibility provisions of ERISA, a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, which is generally known as a “top-hat plan.” To be exempt from the reporting requirements, a notice, generally known as a top-hat notice, is required to be filed with the Department of Labor stating the name and address of the employer, the employer’s EIN, and a declaration that the employer maintains a top-hat plan. References: ERISA §§ 110, 201(2), 301(a)(3) and 401(a)(1); DOL regulation § 2520.104-23.

Window program is a program established by an employer in connection with an impending separation from service to provide separation pay, where such program is made available by the employees for a limited period of time who separate from service during that period. Treas Regs under IRC § 409A provide an exemption from § 409A for severance pay, payable pursuant to a window program that is of a duration no longer than 12 months and that is not offered on a repeated pattern for substantially consecutive periods of time. Reference: Treas Regs § 1.409A-1(b)9(vi). See also “Separation pay plan exception from § 409A.”