Dozens of large corporations - including IBM Corp. and Dow Chemical Co. - are rushing to register their new unfunded deferred compensation plans with the Securities and Exchange Commission.
Although the agency has not yet issued any formal rules on the subject, SEC officials have made it clear that companies need to register such deferred compensation or supplemental executive retirement plans and provide a full description to all participating employees. Otherwise, they could face civil and criminal charges.
Besides IBM and Dow, those that have registered include First Union Corp., Raychem Corp., Lockheed Martin Corp., Lincoln National Life Insurance Co. and Merrill Lynch & Co. Citicorp is expected to register its new plan with the SEC any day.
"Since it was a new plan and a lot of other companies were developing these plans, our attorneys thought it was a prudent thing to do to register it," said Cheryl Zimmerman, compensation analyst at Dow Chemical, which registered its plan with the SEC last year. Dow Chemical's plan covers 2,000 of the company's 55,000 employees nationwide, or roughly 4% of its work force, Ms. Zimmerman said.
Fred Farkas, director of compensation and benefits at Lincoln National, explained the insurer has registered two plans with the SEC - one for executives, the other for agents - because "one of our investment (choices) is phantom stock of Lincoln National. It's not a derivative, but the SEC could say it's a security of the organization," he explained.
Other companies are registering their plans because they are not sure they can claim exemptions from registration, because the SEC has stopped issuing "no-action letters" giving companies the green light that registration is not necessary. That uncertainty is what prompted First Union to register its new plan, explained Kent Hathaway, senior vice president and deputy general counsel.
Meanwhile, Lockheed Martin in December registered a plan with the SEC that allows key employees to defer their incentive compensation, said Ron Meder, a company spokesman. Lockheed Corp. had a similar plan before it merged with Martin Marietta Corp. last year, Mr. Meder noted. The new plan covers about 1,400 key employees of the Bethesda, Md., defense contractor.
At the same time, employee benefits consultants and lawyers suggest many companies might be able to get by without registering their plans until the SEC actually issues a formal mandate.
"The SEC has not issued anything formally, and until it does so, most of my clients believe they fall within exemptions (from registration) that would be available to them," said Max Schwartz, partner in the New York law firm of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel.
Such unfunded deferred compensation plans typically allow highly paid executives to defer a portion of their paycheck and bonuses until they quit their jobs or retire. Eventually, participating executives receive the deferred amount plus returns tied to a variety of investment choices, such as mutual funds or company stock. Those choices can closely resemble options offered by the company's 401(k) plan.
Agency officials maintain such unfunded deferred compensation plans must be registered as unsecured securities because they amount to investment contracts between the company and participating executives.
In the past, the SEC had exempted most such plans from registration as securities, unless participants received returns on the deferred money pegged to the employer's stock.
However, the SEC reversed its position. That's because companies established new plans, or expanded existing plans, in response to the 1993 tax law that jacked up individual tax rates for top earners and scaled back the retirement benefits companies could offer such employees on a tax-favored basis.
That law hiked the highest individual income tax rate to 39.6%, and lowered to $150,000 the salary level on which companies could base pension benefits.
Until then, the SEC had reasoned that so long as employers limited such plans to a few highly paid, sophisticated senior executives, they could claim the same sort of exemption from registration available when they sell securities.
Many of the newer plans now include hundreds of midlevel executives taking home more than $150,000 a year - who lost tax-favored pension benefits based on salaries and bonuses more than that amount.
Moreover, the older plans rarely gave participating employees any choice on the returns their deferred salary and bonus would earn, and thus did not qualify as securities. Many of the new plans are fairly complicated and offer executives an opportunity to earn hefty returns by pegging returns on the deferral to all sorts of funds and investment vehicles.
IBM's new plan, for example, which covers more than 1,000 senior executives earning more than $150,000 a year, lets them assume returns on their deferred compensation pegged to five options: a fixed-income fund; a Standard & Poor's 500 Stock Index fund; a small company fund; an international stock fund; or company stock. Participants may switch among the five options each month.
"We're looking at the fact that you have more people involved in these plans, more people that need the protection" of securities rules, Martin Dunn, chief counsel of the SEC's corporation finance division, said at a conference in New York last fall.
Registration also could protect participants from being dunned by the Internal Revenue Service for income taxes on the deferred portion of their salary and bonuses, some employee benefits lawyers say.
That's because participants in unregistered plans who do not receive prospectuses warning them of the risks of various investment options can demand their deferred money back if those investments tank. But that, explains Thomas Z. Reicher, partner at the Day, Berry & Howard law firm in Hartford, Conn., "is inconsistent with deferral, and you could be hit by the IRS for constructive receipt" of the income now.
"It may be because of that (fear) that companies are falling into line," he said.
To be sure, companies can still claim exemptions from securities rules for their unfunded deferred compensation plans if they cover just a few top-paid executives, or if they defer less than $5 million a year. And the SEC's new position applies only to optional plans that let executives decide if and how much of their salary and bonuses they would like to take at retirement instead of now, as well as plans that let executives put aside money they would otherwise have tucked into retirement plans.