Accredited Wealth Management Advisor Practice Exam

Which statement about nonqualified deferred compensation is false?

1. Substantial risk of forfeiture exists when the employee's receipt of deferred compensation benefits hinges on future performance.

2. Availability of funds without substantial restriction results in constructive receipt.

3. Receipt of anything assigned a cash value leads to economic benefit and taxation.

4. An example of substantial risk of forfeiture is loss of rights at death or disability.

The correct answer is: An example of substantial risk of forfeiture is loss of rights at death or disability.

The statement regarding nonqualified deferred compensation that is false is that an example of substantial risk of forfeiture is loss of rights at death or disability. Substantial risk of forfeiture is characterized by conditions tied to the employee's continued service or performance, meaning that the employee has not fully earned the compensation until specific objectives are met or until they remain employed with the company for a designated period. Conditions such as death or disability, however, do not create a substantial risk of forfeiture. If an employee becomes disabled or passes away, the rights to the compensation typically do not diminish; rather, they may actually be accelerated or paid out in accordance with the terms of the plan. In contrast, the other statements accurately describe aspects of nonqualified deferred compensation. For instance, if an employee's right to compensation depends on meeting performance benchmarks, it illustrates substantial risk of forfeiture. Additionally, when funds are available without substantial restrictions, this situation can lead to constructive receipt, which triggers taxation. Lastly, anything that carries a cash value and is received before the compensation is fully vested can indicate economic benefit, which also results in tax implications.