Nonqualified Deferred Compensation Plans- Bridging the Retirement Gap

Introduction

Financial experts predict that retirees will need 80% of their pre-retirement income to maintain a similar standard of living in retirement. However, qualified plans such as 401(k) programs discriminate against key employees by placing limits on contributions and benefits. As a result, highly compensated employees of many businesses will receive 30% or less of their income at retirement from qualified plans and Social Security alone.

In addition to dollar limits on contributions, qualified plans are also subject to coverage and nondiscrimination testing that may further limit both employee and employer contributions. Without a properly designed executive benefit program to help close this retirement gap, these key employees may not be able to maintain their lifestyle at retirement.

Nonqualified Deferred Compensation Plans (NQDCP) provides significant benefits to both plan sponsor and plan participants:

Sponsor Benefits:

• Allows employers to offer customized retirement benefits to their most valuable employees similar to plans used by over 80% of Fortune 500 companies

• Company contributions limited by IRS restrictions in qualified plans may be restored

• Does not require discrimination testing, minimum participation, or Form 5500 filing

• Optional discretionary incentive contributions to recruit, retain and reward selected key employees

• NQDCP can be designed to recover all plan costs, including interest

• All of this can be accomplished with negligible sponsor cash flow or balance sheet impact

Participant Benefits:

• The opportunity to defer unlimited amounts of income on a pre-tax basis

• Earnings accumulate tax-deferred

• Account values may be based on positive equity returns, usually indexed to the S & P 500, during rising market periods, while guaranteed minimum crediting rates eliminate market-based negative returns during a declining market. This means that your money does not go backwards when the market declines.

• No minimum withdrawal requirements at age 70 ½ or 10% IRS penalty for early withdrawal

• In service distributions can be scheduled prior to retirement for college funding or other goals without penalty

The Challenge

When key employees have maximized their qualified plan contributions, they are left with few other tax efficient retirement savings options. This situation often results in higher personal income taxes and a diminished ability to save for retirement. Furthermore, investment losses in their existing retirement plans may further intensify the need for increased retirement savings, and make achieving their retirement objectives seem unattainable.

Conclusion

Employers face increasing challenges in attracting and retaining key employees. Offering a flexible, tax-favored supplemental program is one way to significantly enhance their recruiting and retention efforts. NQDCP allows C Corporations to offer similar benefits to those available at much larger competitors. We welcome the opportunity to discuss how a NQDCP could be a valuable component of your overall executive compensation and benefits strategy.

About Optimum Strategies

Optimum Strategies is affiliated with Cash Balance Advisors, a national company specializing in assisting highly compensated business owners and executives increase their top line tax deductions while maximizing their retirement benefits for a secure lifestyle that will last beyond their lifetime.