A Primer on the Taxation of Executive Deferred Compensation Plans

Posted: 6 Nov 2002


The Enron scandal has piqued Congress' interest regarding the particulars of executive deferred compensation plans. While Enron's rank-and-file employees, participating in the company's qualified profit sharing plan, watched their life savings plummet in value as the company stock collapsed, Enron executives were selling off their company stock, and receiving bonuses and making withdrawals from their executive compensation plans. With respect to these executive deferred compensation plans, how could these insider Enron executives withdraw massive amounts of deferred compensation in advance of their company's bankruptcy, draining the employer's assets from its creditors? What were the provisions of these executive compensation plans? Were the particulars of these plans readily available to Enron's shareholders and employees, and to the public at large? The answers to these questions were not readily available when Congress inquired, which obviously caused even greater concerns. A variety of legislative proposals have been discussed ranging from corporate governance to tax law changes.

The author was asked to testify before the Senate Finance committee in April 2002 on the tax aspects of executive deferred compensation plans, inquiring how such plans are designed to avoid current taxation to its participants. By late June 2002, the Democrats in Congress initiated a new "corporate governance" legislation that proposed to alter the taxation of executive compensation plans, but only for those plans funded with employer stock. While the Enron executives clearly help company stock, which was sold in advance of the company's bankruptcy, it is not clear whether their executive deferred compensation plans used employer stock as the basis for payment. The Senate Finance Committee proposed legislation in mid-July, tightening the tax rules applicable to executive compensation plans in an effort to prevent future Enron-type scandals. This article is a by-product of the oral and written testimony provided by the author to the Senate Finance Committee in April. It is intended to summarize the existing tax rules applicable to these plans and to recommend whether tax legislation post-Enron is warranted or appropriate. Certainly corporate governance initiatives should be encouraged as a result of Enron; however the author questions relying on the federal tax code to cure Enron's woes as the best avenue.

Suggested Citation

Kennedy, Kathryn J., A Primer on the Taxation of Executive Deferred Compensation Plans. Available at SSRN: https://ssrn.com/abstract=348701

Kathryn J. Kennedy (Contact Author)

John Marshall Law School ( email )

315 South Plymouth Court
Chicago, IL 60604
United States
312-427-2737 ext. 515 (Phone)

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