A growing trend in public companies is to reduce or eliminate retirement pension benefits for outside directors and to move directors' fees to a stock basis. Many companies have cashed out their director retirement pension plans in exchange for stock payments coupled with a deferred compensation plan. A new Tax Code change will present companies with more alternatives in this area and substantial tax savings to outside directors. Outside directors should be advised about this new tax planning opportunity which will allow significant reductions of the self-employment tax that they currently must pay on directors' fees whether payable in stock or cash.
Many outside directors use directors' fees to fund defined contribution plans.
This repeal will now allow outside directors to generate significant deductions to fund defined benefit plans. The cost to sponsoring companies would be nominal, but the directors should be informed that there are more administrative tasks involved in maintaining a defined benefit plan than in maintaining a defined contribution plan. There will be initial and annual actuarial fees, and the need for individually designed defined benefit plans, but, again, the expenses should be nominal. The material in this publication may be reproduced, in whole or in part, with acknowledgment of its source and copyright. This material may be considered advertising under the rules regulating the legal profession.