Offering a package of compensation and benefits that will attract and retain the executive talent an organization needs can be a challenge. While qualified retirement savings plans, such as 401(k) plans, are among the most attractive benefits an employer can offer, highly restrictive federal regulations and tax laws limit the deferrals highly compensated employees can make to these plans. That makes them much less appealing to executive-level employees.
“It’s a big problem,” says Mark J. Dorman, president of Dorman Farrell LLC. “Executives want to save for retirement on a tax-deferred basis like other employees, but they simply can’t under the qualified plan rules. However, there is a solution: nonqualified deferred compensation (NQDC) plans. Because nonqualified plans are not governed by the same rules as qualified plans, they offer employers much greater flexibility in accommodating the retirement savings needs of executives.”
Smart Business spoke with Dorman about NQDC plans, and why companies should consider offering them to their executives.
How many types of NQDC plans are there?
There are two basic types of plans. The first is an elective deferral plan, which works like a tax-deferred savings plan. The employee — typically a highly compensated executive — elects to defer a portion of his or her compensation back to the employer, to be paid at some point in the future. The second type is called a Supplemental Executive Retirement Plan (SERP), in which the employer makes a legally binding agreement to pay additional compensation to the employee at some point in the future — usually at retirement.
What kind of company is best suited for a NQDC plan?
Nonqualified deferral plans work best at companies that have highly compensated employees making $110,000 a year or more. These are the companies that are likely to be running into problems with nondiscrimination and deferral limits in their 401(k) plans. If a company has executives that are able to contribute less than they would like — and proportionately less than other employees can contribute — they are probably a good candidate for a nonqualified plan.
