Non-Qualified Deferred Compensation (NQDC)
These plans are used by businesses to supplement retirement planning of specific employees or business owners. NQDC can help attract top executives as well as keep key executives.
One major advantage to (Non-Qualified) deferred compensation plans is that they can escape the non-discrimination rules imposed on qualified plans. That means (small business owners) can offer the plan to a select group of employees, making it a more cost-effective benefit plan than a qualified plan. Administration costs are lower as well because the plans are exempt from the U.S. Department of Labor's reporting requirements. All that is required is a one-time letter to the DOL stating that your plan is in place and has a given number of participants.
Supplemental Executive Retirement Plans (SERP) are considered by executives to be an especially attractive plan because the company foots the bill for the benefits. SERPs generally are structured to mirror defined-benefit pension plans that promise a stated benefit from the employer at retirement. Companies have the option of funding SERPs either through the general assets (at the time of the employee's retirement) or via sinking funds or the preferred use of Corporate Owned Life Insurance (COLI).
Under the COLI funding method, businesses buy life insurance plans on those directors or executives that they wish to compensate. Premiums are paid by the company and upon retirement of the executive or employee, the firm pays out his or her benefits from operating assets for a previously established period. The company is the sole beneficiary of the COLI policy. At death of the employee, the company would receive the death proceeds of the policy tax-free. NOTE: the company will not receive a tax deduction for its contributions to the SERP until the executive/employee actually receives the benefit payments.
A quick review of NON-QUALIFIED DEFERRED COMPENSATION PLAN ADVANTAGES:
- Easy plan adoption
- Coverage & design flexibility
- Vesting & forfeiture flexibility
- Exemption from burdensome tax requirements
- Partial exemption from ERISA
- Cash compensation option
- Supplement to qualified plans
For a personalized solution for your client's need please contact us at 866.452.3670, or email us at sales@pipaclife.com.
