Final answer:
The incorrect statement about nonqualified deferred compensation plans is that a rabbi trust protects against both a change in control and employer insolvency, but it only protects against a change in control.
Step-by-step explanation:
The correct answer is option b. A rabbi trust provides the employee with protection against a change in control of the company, but it does not protect against employer insolvency. In fact, the assets in a rabbi trust are still available to creditors in the event of the employer's bankruptcy, which is the main difference from a secular trust.
By contrast, a secular trust offers the employee protection from both a change of control and employer insolvency, but it becomes taxable to the employee when there is no longer a substantial risk of forfeiture.
Nonqualified deferred compensation plans are tools commonly used to retain key personnel. These plans can indeed be discriminatory in favor of high-level executives, which distinguishes them from qualified plans that have strict non-discrimination requirements.
Moreover, they are often referred to as golden handcuffs because they incentivize employees to remain with the company due to the deferral of compensation to later years.
The correct answer is option B: a rabbi trust provides the employee with protection against both a change in control and employer insolvency.
A rabbi trust is a type of nonqualified deferred compensation plan that provides protection to employees against the risk of employer insolvency and change in control of the company. It is established and managed by an independent trustee who holds the assets on behalf of the employees. The assets in a rabbi trust are typically invested and the employee will receive the benefits of the trust at a later date, usually in retirement.
Option B states that a rabbi trust does not provide protection against a change in control and employer insolvency, which is incorrect. A rabbi trust is specifically designed to provide these protections to employees.