These employer pay all programs can be structured as a defined benefit, and/or defined contribution plan to attract and retain key employees. The plans are established as a way to give a few people ownership “feel” or a “shared success” in the company and must be “selective”.
The employer “may” determine the benefit as a formula of performance or totally discretionary amount on an annual basis, but is not required to put funds (dollars) aside annually.
This affords flexibility for the employer and gives the participants the look, smell and feel of a Qualified Defined Benefit or Contribution plan to the participant. If the employer does set aside funds, there is no current deduction. Instead, a liability is booked on the balance sheet that becomes a deduction as normal salary when it is paid out (in the future).
Benefits usually do not vested until retirement, death, disability or change of control and also may provide an early retirement provision for the participants as a “golden parachute”. The employer has the right to give each employee a different formula and/or benefit and it cannot be given to all of the employees.