Vesting schedules because erisa does not apply to non

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conditions, post-retirement consulting clauses, and non-compete agreements. Vesting Schedules Because ERISA does not apply to non-qualified deferred compensation plans, companies can establish a vesting schedule that serves their own purposes. They might set a vesting schedule of 5 years, 10 years, or even 15 years! There is no limit beyond the plan administrator’s creative design ideas and what the participants are willing to accept. Performance Conditions A company might set certain performance benchmarks in order to encourage specific goals. This forfeiture provision would help to mitigate the agency conflict, which is when the goals of management can differ from the goals of the owners. A company could say that the balance in a non-qualified plan is subject to complete forfeiture unless the participant’s division reaches a specific growth target in sales or margin improvement. It is imperative that the participant should have the ability to influence whatever performance metric is chosen. It would be unfair to set the benchmark as a target that they will only hit by chance. Post-Retirement Consulting Clauses Sometimes, an employee’s contribution to the company is so incredibly valuable (and virtually irreplaceable) that the employer just does not want to let them go. They can place a clause in the non- qualified deferred compensation plan that provides a benefit only if the participant completes a certain amount of consulting work post-retirement. This can be an effective way to lock in key talents for a longer window of time and allow the participant more time to locate and train a replacement. Non-Compete Agreements Another potential forfeiture clause is a non-compete agreement. This would state that the participant would lose all benefits if they work for a competitor within a certain window of time. One caveat is that the window of time must be reasonable, such as a few years. It would not be legal to say that they could never again work for a competitor, period. The non-compete clause will also only work within a specific geographic region. For example, a senior executive at a regional bank could be prohibited, through the non-qualified deferred compensation plan, from working for a competitor within a 2-year period of time in the same region covered by the former employer. However, it would be perfectly legitimate for the executive to work for a different regional bank in another part of the country. Remember that after a substantial risk of forfeiture is removed, the balance in a non-qualified deferred compensation plan is fully taxable to the participant unless they also do not violate the economic benefit rule and the constructive receipt rule.
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To offset the effect of these forfeiture clauses, it is common for companies to offer some level of protection for plan participants. The most common is the golden parachute that we already discussed.
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