Question
From: (Redacted)
Sent: Thursday, January 12, 201211:17 AM
To: Verne,B. Michael; Walsh, Kathryn
Subject: Deferred Compensation Plans
HiKate and Mike.
Iam writing to close the loop on my inquiry at the end of December concerningequity-based compensation plans by employers ("Companies") and theiruse of rabbi trusts to facilitate deferred compensation plans. Since I sent myinitial e-mail inquiry to you, I have learned more about such trusts andbelieve that Company shares placed in such trusts should not be deemed to bebeneficially held by executives until such shares are distributed toexecutives. I am writing to confirm that you agree with this analysis.
Thepurpose of deferred compensation plans is to permit executives to defer receiptof salary and bonus that would otherwise be nondeductible by the Company undersection 162(m) of the Internal Revenue Code of 1986 as amended, which limits to$1 million the amount of compensation paid to certain executive officers thatmay be deducted in a single tax year. Deferred amounts are paid to executivesin a subsequent tax year when it is expected that the amounts will bedeductible. Deferred amounts are often deemed to be invested in hypotheticalshares of Company common stock, with the number of phantom shares allocated toa participant's account determined by dividing the amount of compensationdeferred by the market value of the Company's common stock on the deferraldate.
Thereare various ways to structure a deferred compensation plan ("Plan")for executives. Under such plans, Companies sometimes establish all irrevocablerabbi trust to assist in the payment of amounts that become due to executivesunder the Plan. I understand that rabbi trusts do or could contain thefollowing features and characteristics.
(1)Under the Internal Revenue Code, rabbi trusts are deemed grantor trusts all theCompany is the grantor.
(2)The principal of such trusts, along with all earnings thereon, are heldseparate and apart from other funds of the Company and are used exclusively forthe uses and purposes of Plan participants.
(3) Plan participants do not have any preferredclaim on any assets of such trusts. Any rights created under the Plan and thetrust agreement are unsecured contractual rights of Plan participants againstthe CompaJ1Y. Any assets held by such trusts are subject to the claims of theCompany's general creditors U11der federal and state law in the event ofinsolvency.
(4)For federal tax purposes, the creation of a rabbi trust and the investment oftrust assets in Company common stock do not cause the Plan to be other than"unfunded," i.e. payable from the employer's general assets. TheCompany is treated as the owner of the trust and must include all of theincome, deductions and credits of the trust in computing its own taxable incomeand credits.
(5)The Company designates the trustee(s) of rabbi trusts and has the sole right toremove and replace such trustee(s).
(6) All rights associated with the assets heldin the rabbi trust, including the right to vote Company common stock held bythe trust.are exercised by the trustee or the person designated by the trustee.
(7)The executives who participate in the Plan do not have a right to demanddistributions from the rabbi trusts. The Company has the discretion to pay aPlan participant directly and if a Company chooses to do so, the shares held inthe rabbi trust for the Plan participant would then be distributed to theCompany.
(8)The interests of the participants in the Plan are indistinguishable for tax purposesfrom the interests of holders of restricted stock unit awards prior to thedistribution of shares of stock to satisfy such awards.
Pleaseconfirm that you agree that executives who participate in Plans, with the termsdescribed above, are not deemed to have beneficial ownership over any Companysecurities held by such trusts unless and until the trust distributes Companyshares to such participants.