09 Aug Rev Up Retirement Offerings With An NQDC Plan
Many business owners and executives would like to save more money for retirement than they are allowed to contribute to their 401(k) plan. For 2017, the annual elective deferral contribution limit for a 401(k) is $18,000, or $24,000 if you are 50 years of age or older.
This represents a significantly lower percentage of the typical owner-employee’s or executive’s salary than the percentage of the average employee’s salary. Therefore, it can be difficult for these highly compensated employees to save enough money to maintain their current lifestyle in retirement. That is where a non-qualified deferred compensation (NQDC) plan comes in.
NQDC plans enable owner-employees, executives, and other highly-paid key employees to significantly boost their retirement savings without running afoul of the nondiscrimination rules under the Employee Retirement Income Security Act of 1974 (ERISA). These rules apply to qualified plans, such as 401(k)s, and prevent highly compensated employees from benefiting disproportionately in comparison to the average employee.
NQDC plans are essentially agreements that the business will pay out at some future time, such as at retirement, compensation that participants earn now. Not only do such plans not have to comply with ERISA nondiscrimination rules, but they also are not subject to the IRS contribution limits and distribution rules that apply to qualified retirement plans. So, businesses can tailor benefit amounts, payment terms, and conditions to the participants’ specific needs.
There are several types of NQDC plans. Among the most common are:
- Excess benefit plans
- Wraparound 401(k) plans
- Supplemental executive retirement plans
- Section 162 executive bonus plans
- Salary-reduction plans
The key to an NQDC plan: because the promised compensation has not been transferred to the participants, it is not yet counted as earned income — and, therefore, it is not currently taxed. This allows the compensation to grow tax-deferred.
Naturally, there are challenges to consider. NQDC plans are subject to strict rules under Internal Revenue Code Sections 409A and 451, and plan loans generally are not allowed. However, attracting and retaining top executive talent is a business imperative, and an NQDC plan can help you win the talent race with a powerful benefits package. Please contact our firm for further details.