Grayck, Marcus D.

English

Duke Law Scholarship Repository

BOOK REVIEWSappraisal of such matters as merger proposals or proposals for di-versification of a portfolio company's business.2 7There is, of course, a limit upon how much can be covered-andhow extensively-in a two day conference of oral presentations, nomatter how carefully prepared. Inevitably this volume will leavethe reader dissatisfied and hungry for more information in manyareas. This does not detract from the fact that the volume is a lodeof both not easily accessible information and fresh thought. It willbe useful for present and future reference. It will be more usefulif it is read in toto before being relegated to the library racks.ALLAN F. CONWILL*DEFERRED COMPENSATION FOR KEY EMPLOYEES. By Clark C. Havig-hurst.t Mundelein, Illinois: Callaghan & Company, 1964. Pp. xi,383.The stated dual purpose of this book is to provide "a guide forbusinessmen seeking to educate themselves on a matter of businessplanning and a lawyer's introduction to the technical aspects ofdeferred compensation."'  This is no small order for any singlevolume work, especially one of such compact proportions. Havingtaught a graduate law course in the tax aspects of deferred com-pensation, this reviewer can well appreciate the multitude of prob-lems the author faced with the task of providing lawyers with aninsight. Undoubtedly, these problems were compounded by theauthor's attempt to bridge and satisfy the needs of both the business-man and the lawyer. The book falters and just misses the mark byreason of its attempt to be all things to all men. Possibly, thisdual purpose was dictated by the fact that the book is one of aseries of investigations into legal problems of small businesses whichwere undertaken as the result of a grant from the Small BusinessAdministration. If this be the case, one can only speculate whetherit would not have been wiser to publish two companion books-27 Id. at 215. (Emphasis added.)* B.S. 1943, J.D. 1949, Northwestern University. Lecturer, Columbia UniversityLaw School. Member of the New York bar.t A.B. 1955, Princeton University; J.D. Northwestern University; Associate Professorof Law, Duke University.'AVIGHURST, DEFERRED COMPENSATION FOR KEY EMPLOYS at iii (1964).Vol. 1965: 842]DUKE LAW JOURNALone for businessmen and one for lawyers-instead of compressingthe materials for both groups into one volume.Nonetheless, the book's format is suited to its onerous task.By addressing the text to both lawyers and businessmen and byproviding in addition copious footnotes and "memoranda of law"for the lawyer, the author has designed a workable vehicle. Despitea disclaimer of any intention to provide forms to aid the attorney indrafting a deferred compensation plan, the book contains helpfulsuggestions.The book's two-chapter treatment of nonqualified plans and thestock option sections introduced by the 1964 amendments to theInternal Revenue Code is excellent. The material on the self-employed, or so-called Keogh Plans,2 is well presented, clear andconcise. Examples and charts are given the reader to enable himto determine the ultimate question under Keogh Plans-whetherthe game is worth the candle. The author poignantly brings homethe tax effects of two methods of Keogh Plan distribution by com-paring taxes imposed on a lump sum payment as contrasted with thetaxation of distribution in fifteen annual installments.The bulk of the book deals with qualified pension and profit-sharing plans for corporate employees and the self-employed. Cer-tainly this is the area requiring concentration. However, it isin the treatment of qualified pension and profit-sharing plans thatthe book suffers. It is important to establish a solid footing in thefundamentals of these qualified plans.Thus, the three types of qualified pension plans-flat percentagebenefit, unit benefit and money purchase plans-should be illustratedand analyzed at the outset.2 If the characteristics, similarities and2 The so-called Keogh Act of 1962 amended INT. REV. CODE OF 1954, § 401, makingit possible for self-employed persons to establish and participate in tax favored retire.ment plans comparable in some ways with qualified corporate plans. Self-EmployedIndividual Tax Retirement Act of 1962 (Keogh Act), 76 Stat. 809 (1962).'"In general, apart from union negotiated flat amount benefit plans, there are threetypes of pension plans. A flat percentage benefit pension plan provides for a retire-ment benefit by reference solely to a percentage of compensation-for example, fortyper cent of average compensation for the last five years before retirement. The unitbenefit plan, unlike a flat percentage benefit pension plan, takes into account lengthbf service in arriving at the retirement benefit. Thus if one per cent of salary is thebenefit of each year of service, two employees with the same salary, but with differentlengths of service, will receive different retirement benefits. The third type of pensionplan is a money purchase plan. Under such a plan, a percentage of the participant'scompensation is contributed each year and the retirement benefit is that which is pur-chasable with the amount in the participant's account. A money purchase pension[Vol. 1965: 842BOOK REVIEWSdifferences, advantages and disadvantages of the three types ofqualified plans are not grasped, it is impossible to achieve theauthor's major purpose of defining "the limits which may beapproached with safety in an attempt to reward key employees."Certain situations will cry out for the use of a flat percentagebenefit pension plan as opposed to a unit benefit plan. Nevertheless,the book neither directly mentions nor illustrates a flat percentagebenefit pension plan but limits its focus instead on the unit benefitpension plan.4The text presents certain generalizations which may suffice forthe businessman but cannot adequately serve the lawyer. Much ismade of the point that pension plans are "designed to provideemployee security plus a reward for a long term of service to theenterprise." Notwithstanding this, the author states that profit-sharing plans "are expected to offer current incentive supposedlybased on the quality of current service." These somewhat counter-vailing theories can only serve to confuse the novice attorney lookingfor guidance. A flat percentage benefit pension plan need not takepast service into consideration. If the situation involved a newenterprise with a fifty-five year old man at the helm, he would bebetter served by a flat percentage benefit pension plan than by aprofit-sharing plan. Even more to the point, he can have such apension plan regardless of the fact that he has had no record of pastservice with the company.The author also fails to analyze adequately the pros and cons ofvarious funding mechanisms. Nowhere is there mention of theretirement income contract which is an excellent tool devised byplan does not differ from a profit-sharing plan, except that the employer is committedto contribute to the former without regard to profits. Flat percentage and unit benefitpension plans are benefit oriented in that retirement benefits are anchored, and con-tributions to fund these benefits vary in accord with actuarial necessity. Money pur-chase pension plans and profit-sharing plans are contribution oriented in that theirbenefits vary and are dependent, inter alia, upon the size and frequency of contribu-tions and the rate of investment return." Grayck, Tax Qualified Retirement Plansfor Professional Practitioners: A Comparison of the Self-Employed Individuals TaxRetirement Act of 1962 and the Professional Association, 63 CoLuM. L. REv. 415, 420(1963).]Presentation of the three types of qualified pension plans would logically leadinto the areas of costs, funding and deductions. The first three subsections of Code§ 404 (a) (1) are geared for the money purchase, fiat percentage benefit and unit bene-fit type pension plans. INT. REV. CODE or 1954, § 404 (a) (1). Dramatic differences incontributions and deductions for the same ultimate benefit could be illustrated if athorough grounding in basics had been presented.Vol. 1965: 842]852 DUKE LAW JOURNAL [Vol. 1965: 842the insurance industry for funding qualified pension plans. On theother hand the author carps at self-administration for small tomedium sized pension plans because actuarial fees may make themtoo costly. Even though insurance companies do not charge sep-arately for actuarial service, premiums reflect load charges, and otherexpenses. Thus, a self-administered plan, even with actuarial costs,may be less.5The book's deficiencies as a "do-it-yourself" kit for qualifiedplans should not detract from its general usefulness to those prac-ticing in the field of qualified plans. The chapter dealing with thetax benefits of qualified plans is excellent. The material concernedwith the contractual aspects of pension plans will cause the drafts-man to sharpen his thinking and consider the problem in lengthand depth. Much of the book's apparent failure must be attributedto its duality of purpose and, yet, both the businessman and prac-titioner should gain from reading this treatment of the intricaciesof deferred compensation.MARcus D. GRAYCK*"In one instance worked on by this reviewer, conversion from a fully insured planto a self-administered pension trust resulted in a 30% decrease in cost even withactuarial costs thrown in.Adjunct Assistant Professor of Law, Graduate Division, School of Law, New YorkUniversity, Member of the New York bar.

Deferred Compensation for Key Employees. By Clark C. Havighurst

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Deferred Compensation for Key Employees. By Clark C. Havighurst

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