Deferred Compensation for Tax-Exempt and Governmental Executives

One of the most significant challenges in attracting talented executives in the tax-exempt and governmental entity (TE/GE) sectors is designing a compensation structure that accomplishes three goals: rewards acknowledged “superstars” in the field; incentivizes performance commensurate with the long-term goals of the entity; and sufficiently protects the entity against employees’ being lured away by other employers.

TE/GEs are continuously looking to creative compensation mechanisms that duplicate the benefits of equity compensation available from corporate employers. (Look no further than the recently revised IRS Form 990 Schedule J reporting requirements for tax-exempt entities, which identify 69 separate categories of compensation.) While there are numerous compensatory benefits available to TE/GE executives, the form that most closely approximates the tangible and intangible benefits of equity compensation is “deferred compensation.” However, deferred compensation for TE/GE executives must comply, in both operation and documentation, with a complex and interrelated scheme of federal tax requirements.