Non-Qualified Deferred Comp Plans
Attracting, retaining and motivating talented executive and professional people is a requirement of any successful enterprise. To get the attention and services of gifted people, it takes more than standard benefit and retirement plans. Qualified retirement plans and most employee benefit plans must be “non-discriminatory.” And they face Federal Limits on the compensation that may be recognized and the contributions to and benefits from such plans. Non-qualified Plans face no such limitations and can be designed to reward performance. Company and participant contributions can be based on what we term “People Strategies” that follow and help implement “Business Strategies.”
The accounting, cash flow and tax aspects of these plans are complex but the rules are clear and easy to follow. We have since designing our first such plan for a large bank in 1981, contributed to the design and administration of these plans for many organizations, ranging from Fortune 100 to Hospitals, Law Firms, Manufacturing Firms and privately owned companies. Our clients enjoy the use of our unique “Financing Matrix” in deciding how best to finance these plans.
In both the non-profit world as in the public corporate world, a concern of participants in these plans is the absence of protection against corporate creditors should the sponsoring organization have financial difficulties. Working in concert with some nationally prominent plan administrators, and trust companies, we offer a program that insulates participants from creditors, not only of the plan sponsor, but creditors of themselves. For physicians and other professionals concerned from liability claims, this is particularly attractive!
An example of such a plan is our KEEP Supplemental 401(k) Plan which provides a blend of retirement and survivor benefits. Consider this hypothetical case, (which mirrors an actual client situation). The ABC Company is trying to recruit a new CEO and CFO as well as direct reports who might follow them. In place is a 401(k) plan with a matching corporate contribution of 50% of employee contributions to a maximum of a six percent total contribution. Also in place is group term life insurance for all employees of two times annual compensation.
Where he works now, the CEO candidate has a profit-sharing plan with up to a 10% contribution of IRS covered comp limit as well as a 401(k) plan, the latter having the same corporate match as that of ABC.
The CFO candidate is with a different firm and has only a 401(k) plan but the corporate match is $1 per $1 of employee contribution.
Both candidates have asked for a large survivor benefit for their families and both have expressed concerns about three key issues:
A. Future income tax rates and the fact that retirement income benefits may be seriously impacted. Is there some way to make the benefits income tax free?
B. ABC is sound financially but carries a fairly hefty debt load. As participants in a non-qualified supplemental plan, they don’t like being “unsecured creditors” of ABC.
C. Both have said that any “promise to pay benefits” to them and/or their families will have to properly financed so that as the liability to them grows, so would a dedicated asset.
An interesting observation by both was the concern they had about bringing with them their executive assistants whose incomes would qualify them for participation in a non-qualified plan under the DOL “Top Hat Guidelines.”
The Executive Committee and the Compensation Committee of the Board used our program to satisfy these needs. Our KEEP Supplemental 401(k) Plan is very flexible and can provide different benefits for different employees. Our customized recommendation in this case is:
CEO Benefit Package
- ABC Company will contribute up to 12% of Total Comp to a Non-Qualified Profit Sharing Account and will match 100% of his contribution to the Supplemental 401(k) Plan up to 8% of Total Comp.
- The combined plans offer 43 different investment options from the CEO may elect.
- The accruing liability to the CEO will not be subject to ABC creditors or to claims of his own creditors.
- The ABC and CEO contributions will be currently taxable to the CEO but, the full contribution will be invested for his benefit until retirement so he enjoys the full economic value of both ABC and his own contributions earning for him during his active years.
- The retirement income benefits will, based on current tax law, be income tax-free to him and his family.
- A $3,000,000 survivor benefit will be payable to his family if he dies prior to retirement and a large survivor benefit payable the rest of his life.
- Note: Should he become disabled before retirement, the company contributions will be continued by an insurance company to his account.
CFO Benefit Package
- ABC Company will contribute up to 6% of Total Comp to a Non-Qualified Profit Sharing Account and will match 100% of his contribution to the Supplemental 401(k) Plan up to 8% of Total Comp.
- The combined plans offer the same 43 different investment options as for the CEO, and the accounts in each will not be subject to the ABC creditors of claims of his own creditors.
- The same income tax treatment as outlined above the CEO apply for the CFO.
- A $2,000,000 survivor benefit will be payable to his family prior to retirement and a large survivor benefit thereafter.
Executive Assistant Benefit Packages
- Both the CEO and the CFO will be allocated a specified amount of annual expense to ABC with which to purchase benefits for each assistant as they desire to meet their individual and family needs.
- They may select from a wide array of benefits including retirement accounts, life, disability or long term care insurance for themselves and/or their families.