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Recent Court Decision May Alter Approach to Incentive Compensation and Deferred Compensation

In creating incentive compensation programs, there is often an element added to increase retention as well as to provide a tax deferral opportunity and additional long-term savings for participants.  As more provisions are added to incentive plans, additional care must be followed to avoid potential pitfalls.  A recent U.S. Court of Appeals case provided by the Fifth Circuit (Tolbert v. RBC Capital Markets Corp.) highlights this importance and may in fact alter certain historical approaches.  The opinion states that a deferred compensation plan through which RBC financial advisors received annual bonuses and made other income deferrals was an “employee pension benefit plan” governed by the Employee Retirement Income Security Act of 1974 (ERISA).  Although the RBC plan’s primary purpose was not to provide retirement income, the court ruling indicated that it nevertheless was governed by ERISA because its express terms “resulted in a deferral of income by employees for periods extending to the termination of covered employment or beyond.”

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