Non-Qualified Deferred Compensation by CRI

Non-Qualified Deferred Compensation

What is Non-Qualified Deferred Compensation? There are two portions to the definition: Non Qualified – not qualified under Internal Revenue Code or the Employee Retirement Income Security Act (ERISA). Deferred Compensation – is deferred long term bonuses.

Design Features of a NQDC:

NQDC’s are flexible plans that promise to pay monies for participants at a specified time in the future.
These plans may be funded or not funded on a current basis. The values of the deferral is booked as both a liability (obligation to pay employee), as well as an asset (cash retention to capital) to the company.
NQDC plans may take various forms, but must meet certain IRS restrictions.
An example of a NQDC is a Supplemental Executive Retirement Plan (SERP).
These plans are also referred to as “Top Hat” plans.
Offered only to highly compensation employees.
Plan acts almost like 401k. However, it is not meant to replace 401k, both plans work together in tandem.

Advantages of NQDCs

These Plans are extremely flexible.
It is not necessary to divulge financial information to participants.
No caps on contributions.
Can be compensation at 55 years old or until employee leaves company.
New employees in executive position favor companies with NQDC Plans as well as an excellent benefit to recruitment tactics.
Good source of investment when the employee exceeds 401k allotment.
Very inexpensive to set up and administer.
Booked as asset, which increases cash flow to company., i.e., an executive earning 100k in salary defers 25k…the company then is not responsible for payroll tax.
Works well with other executive compensation programs
Many more options with a Non Qualified plan, than a Qualified plan.
Allows deferral of Long Term Incentive bonuses into program.
Benefits company because employees have no direct ownership of funds.

Advantages and attraction of NQDCs to smaller firms:

Requires little cash to implement.
Many more firms/executives maxing out 401k plans.
Plan helps make up for various short falls in 401k plan.
While the NQDC plan is structured for owners, it is keyed towards employees of the future.
A small company today could set up a prototype NQDC up in under a month.
With advances in technology and software, allows lower hard costs.
Major tax advantages to employee (not taxed until exorcised).
Company gains interest on monies saved.
Allows saving at same or higher rate.
Indirectly encourages savings (capital accumulation).

Disadvantages of NQDCs

No direct tie-in to company performance.
Company can only offer to no more than top 10% (in salary) of employees.
IRS rules prevent highly compensated employees ( 90k+) from getting similar matches to 401k contributions as everyone in company.
Does not benefit employee because monies are subject to claims of creditors if company goes bankrupt or sued. Can only be protected if placed in “Secular Trust, ” which would cause immediate taxation to executive.

To find out more on how Compensation Resources, Inc. can help your company with Non-Qualified Deferred Compensation, please contact us or call us directly to speak with our compensation consultants at 877-934-0505.