Asset Management | FJG/FYI
Even The Playing Field with Nonqualified Plans
Want to establish an equitable benefits
program for all of your employees? While
you’re doing so, how about rewarding
key employees within your company?
Interestingly enough, in order to truly
provide comprehensive benefits to all,
employers should consider remunerating
the highly-compensated employee (HCE)
above and beyond the basic benefits
and salary package provided to the non
highly-compensated (NHCE)—with a
nonqualified plan.
What does this mean and how does this work? HCEs have salary-based pension plan contribution limits that often do not allow them to save a proportionate percentage of their pay (compared to NHCE contribution limits) for retirement. To “even the playing field”, an employer can use a nonqualified plan to provide incentives above and beyond pension plan contribution limits. Additionally, and certainly of great importance, this is an opportunity for employers to recruit, retain and reward key executives.
A nonqualified plan allows HCEs to defer
the receipt of taxable wages or bonuses until
some future year when, ostensibly, they’re
in a lower tax bracket—thereby paying less
in taxes when the compensation is received.
Although nonqualified plans are easier
to establish than qualified plans, there
are specific rules that must be followed
to achieve the objective of deferring an
employee’s taxable compensation. All
nonqualified plans must satisfy the
following three requirements:
- The deferred compensation arrangement between the employer and the employee must be entered into before the compensation is earned by the employee.
- The deferred compensation cannot
be available to the employee until a
previously agreed-upon future date or event. - The amount of the deferred compensation cannot be secured; it must remain available to the employer’s creditors.
Using a nonqualified plan to even the playing field and provide recruiting incentives is a “can’t miss” proposition! For more information regarding these plans, please speak to your financial advisor.